As global central banks enact ever-looser monetary policies, yield-starved investors around the world are now turning to the attractive payouts from the developing markets. U.S. investors can also gain exposure to emerging market dividend stocks through exchange traded funds.
“Investors are switching into EM stocks for yield ‘income’ given a lack of bond income in developed markets,” UBS AG analysts led by Geoff Dennis said in a note, according to Bloomberg.
Traditionally, emerging market equities have been seen as a bet on global growth and are usually bought for capital gain instead of income generation. Additionally, volatility in emerging equities, especially after accounting for foreign exchange risks, can overwhelm positive carry, which may weigh on stock valuations based on interest rates.
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However, the UBS analysts argued that fixed-income portfolio managers who also have a mandate to acquire equities, or so-called cross-over investors, are now eyeing the emerging markets.
“EM equities are usually bought for growth (although not in the last five years) or for beta to seek outperformance in rising global markets,” UBS analysts said. “EM is usually only viewed as a ‘yield play’ if investors want to adopt a defensive posture in the face of weak global markets. However, at present, we are hearing more and more about investors looking for ‘yield’ in EM as a way to play rising markets, in a world where growth remains, at best patchy. This hunt for yield in EM appears to be a particular focus for global investors who have been underweight in EM for several years and are now looking for ‘cross-over’ opportunities.”
Trending on ETF Trends
Over the past few months, foreign investment flows into emerging market stocks surged, despite any notable changes to the growth, dividends and corporate earnings in the developing economies.
The only standout factor may be the attractive yields, with the EM dividend yield relative to the yield on the benchmark 10-year Treasury now close to its highest in recent years and well above the long-term average of minus 108 basis points.
As loose central bank policies pushed up valuations on investment-grade government bonds, the low bond yield environment has upturned the traditional role of emerging stocks.
U.S. investors can capitalize on the rush toward emerging market dividend payers through related ETF strategies. For example, the WisdomTree Emerging Markets Equity Income Fund (DEM) , which tracks high-dividend-yielding companies in the emerging market region, has a 4.90% 12-month yield. Additionally, investors can look at the WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) , which has a 3.14% 12-month yield, for dividend-paying small-cap exposure.
ETF investors may also consider fund options from other providers. For instance, the iShares Emerging Markets Dividend ETF (DVYE) has a 4.83% 12-month yield and the SPDR S&P Emerging Markets Dividend ETF (EDIV) has a 4.99% 12-month yield.
For more information on dividend stocks, visit our dividend ETFs category.