Adding A Dose Of Emerging Market Dividends

By Aaron Levitt | February 29, 2012 AAA

With slower growth affecting much of the developed world, investors have started to show a preference for faster moving emerging markets. Once exotic nations like China, Brazil and Malaysia have become common place in many portfolios. The broad-based iShares MSCI Emerging Markets ETF (NYSE:EEM) has grown to nearly $38 billion in assets. However, despite the rosy long term picture for these nations, the short term ride is often bumpy. Volatility remains a constant issue for investors in developing countries. Nevertheless, there is a way for investors to smooth out their ride and get some much needed income.

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Not Just Growth Elements
While many investors look towards the emerging world for a capital gain component, the regions are quickly becoming income plays as well. In the past, it was difficult to find dividend paying stocks located in emerging markets. But as these countries have grown and developed, dividend paying companies have become much more prevalent. Foreign firms have traditionally held a more dividend-friendly culture, paying them to shareholders rather than keeping them as retained earnings. This is holding true in the emerging market sector as well. According to asset manager WisdomTree Investments (Nasdaq:WETF), emerging markets paid more than $175 billion in dividends during 2011 and delivered some of the fastest growth in aggregate dividend streams among major regions.

That income stream could be exactly what investors need to cushion the overall volatility associated with these markets. Looking at two broad indexes that track EM dividend payers, the S&P Emerging Markets Dividend Opportunities and Dow Jones Emerging Markets Select Dividend, helps underscore that fact. Both showed high correlation to the MSCI benchmark at 97%. However, when looking at the "up-down" capture rates of each, the dividend payers shine. The indexes are able to "capture" roughly 96% of the benchmarks upside movements, while preventing much of its downside at 76% and 87%, respectively. Overall, the hefty dividend payouts helped cushion the downside movements in the broad index.

All of those rupee, real and yuan paid dividends could be worth a lot more in the future. While the U.S. dollar has been the "best house in the bad neighborhood" as of late, the general trend for the currency is down. This expected long-term decline in the greenback makes these international dividends that much sweeter. As these rubbles or baht are translated back into dollars, portfolios are able to enter into an arbitrage-style transaction and potentially receive higher payouts as their home currency falls.

Playing These Dividend Payers
For investors, tilting some of their emerging market exposure towards dividend paying firms can do portfolios a world of good, when it comes to stemming volatility. The WisdomTree sponsored Emerging Markets Equity Income ETF (NYSE:DEM) could be a good starting point. The $3.2 billion fund tracks nearly 300 EM dividend payers including Taiwan Semiconductor (NYSE:TSM) and Banco Santander (Brasil) S.A. (Nasdaq:BBSR). Since its inception in 2007, the fund has provided a 6% annual return. The fund currently has a SEC 30-day yield of 7.16%. Additionally, investors can use the SPDR S&P Emerging Markets Dividend (Nasdaq:EDIV), which tracks the previously mentioned the S&P Emerging Markets Dividend Opportunities index. (For more on ETFs, see An Inside Look At ETF Construction.)

Another interesting option for those looking for a broad choice is the
EGShares Low Volatility EM Dividend ETF (Nasdaq:HILO). The fund tracks 30 different firms and is designed to provide high income while being significantly less volatile than the broad MSCI Index. The ETF yields a hefty 6.98%.

Finally, investors wanting to go the individual route may want to look at Brazil. Brewer Companhia de Bebidas Das Americas or AMBEV (NYSE:ABV) is great way to play the rising middle class consumers throughout the nation and yields a strong 4%. Similarly, power producer CPFL Energia S.A. (NYSE:CPL) is a great way to play the nation's expanding industrial and economic growth. CPFL yields 5.2%.

Bottom Line
Low growth in the developed world has many investors have begun looking towards the emerging one. While the long term promise of these nations is certainly great, volatility is a hallmark of regions. For investors, adding a dose of emerging dividend payers can do wonders to stem that volatility. The previous picks along with the WisdomTree Emerging Markets SmallCap Dividend (NYSE:DGS) make great choices.

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