Western investors should focus more on emerging market dividend yields, says ING IM’s Vandenbulck

Manu Vandenbulck, senior investment manager at ING IM, comments that investors in the West need to pay more attention to dividends from emerging markets.

From a pure dividend yield perspective, ING IM believes that Western investors should give greater consideration to emerging markets where dividend growth is supported by low levels of company debt coupled and high profitability.

Looking forward, ING IM predicts that dividend income will be more significant in overall emerging market equity returns as capital gains achieved over the last decade will be difficult to repeat

Vandenbulck said: “Western investors have always played the emerging markets income story through investing in multinational consumer goods companies, which generate a large part of their profits from emerging markets. However, from a purely dividend yield perspective, investors can consider increasing their exposure to home grown companies here.”

“The dividend yield on emerging market equities, which is currently 3%, is now higher than some major developed markets such as the US at 2% dividend yield and Japan at 2.6%. This year, emerging market companies will pay 35% of retained earnings as dividends, which is a third higher than in 2000.”

The investment manager notes that a higher percentage of emerging market companies are paying dividends than in the developed world – around 85% compared to 82%. Currently, there are around 600 stocks in emerging markets – that are sufficiently liquid for institutional investors – offering dividend yields of over 2%. As a consequence, today, more than 600 stocks in emerging markets globally offer a dividend yield of over 2% and are sufficiently liquid for institutional investors.

Furthermore, ING IM states that currency exposure can also be a plus for investors – western based investors recently paid dividends in the Indonesian Rupiah or Brazilian Real would have netted some attractive currency gains.

ING IM says that there are several arguments underpinning the attraction of investing in emerging markets dividend stocks:

Improved capital discipline and a better understanding of shareholders

Emerging market companies have become more investible as their commitment to dividends increases shareholder alignment and accountability.

Less debt and growing cash flow

Emerging market companies have less debt than their counterparts in the developed world, and many are also amassing cash faster than they are paying out dividends. This underpins dividend sustainability and dividend growth potential.

Government policy

Many listed emerging market companies are partly owned by their governments, and there is evidence here that in some cases the State is keen to access some of the cash held by these companies.

Last year, Russia’s largest company Gazprom announced it would double dividends while cutting capital expenditure by 40%. In India, the government has asked state run companies such as ONGC and SAIL to raise dividends. One reason for this is that some of these countries need cash to meet their policy obligations, and dividends have a key role to play here. Given this, minority shareholders can often benefit from a strong dividend commitment, and this has also contributed towards shares of many state owned enterprises (SOE’s) performing well.

Maturing businesses

Emerging market countries have stronger fundamentals than their Western counterparts, but the dividend potential of emerging market equity is often overlooked. They show almost double the earnings growth of developed markets and have outperformed the latter significantly over the last decade.

Also, high dividend stocks have outperformed in growth areas like emerging markets. In Asia, the highest dividend -yield stocks have outperformed both the broader index and the highest growth companies over the past 15 years.

Manu Vandenbulck concludes: “It is no secret that emerging market equities have been seen as attractive because of their strong capital growth potential, but increasingly the story for investing in this asset class has expanded to include dividend yield. Many of these emerging markets have ‘emerged’ and they offer some of the best investment opportunities of anywhere in the world from both a capital growth and now a dividend yield perspective.

“However, when looking for an income here, experience is key. For example, the dividend policy of many companies in emerging markets is simply based on a pay-out ratio of profits; as such dividend volatility will be as high as earnings volatility. In some countries such as Brazil and Taiwan, companies are obliged by law to pay out a certain percentage of profits in dividends. This increases the investible universe for dividend investors in emerging markets, but does not necessarily mean these dividends are sustainable. Companies with a “progressive dividend policy” are still rare in emerging markets.”

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