It is time for western investors to diversify their dividends exposure into emerging markets where low levels of corporate debt, coupled with high profitability, support dividend growth.
Looking forward, we expect dividend income will grow in significance in overall EM equity returns, as capital gains achieved over the past decade will be difficult to repeat. Moreover, in a volatile equity environment dividend-paying stocks can smooth portfolio volatility. Today, more than 600 stocks in global emerging markets offer a dividend yield of more than 2% and are sufficiently liquid for institutional investors.
Emerging markets: more than a growth story
Until recently, emerging markets (EM) equities did not figure in an income seeker’s horizon. After all, companies in the developing world have generally preferred to use profits to grow the business rather then distribute them to shareholders. Hence, the perception that EM investments will offer share price gains but little income.
However, following the Asia crisis and several other crises in the 1990s companies in the emerging world began to embrace a dividend culture, prioritizing good cash flow and prudent balance sheets. Additionally, investors increasingly began to favour the stability of dividends. This trend has accelerated in the post-credit crisis environment as the ‘search for yield’ has intensified.
Currently, the dividend yield on EM equities is approximately 3%, higher than for some major developed markets, such as the US (2%) and Japan (2.6%). Also, EM companies will pay 35% of earnings as dividends in 2012. This is one third above what in was in the year 2000.
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