David Fabian: Income investors have known this day would come eventually – just as you shift all of your focus to U.S.-based markets where the momentum was strongest, the tide turns to overseas strength. Emerging markets in particular have been a well-documented story of “great fundamental theme, awful price action”.
Nevertheless, the tide has turned this year on many dividend paying stocks in emerging market countries, which makes it a perfect time to review your existing international positions to determine if changes are needed.
As a relative benchmark, the iShares International Select Dividend ETF (IDV) can provide us with some perspective on the concept of high quality foreign companies with consistently high yields. IDV owns 100 stocks of primarily developed markets such as Australia, United Kingdom and France. This ETF also sports a trailing 12-month dividend yield of 4.95%.
Since the beginning of the year, IDV has gained 6.5% and recently broke out to new year-to-date highs. This fund is now also back above its 50 and 200-day moving averages, which is a strong technical sign.
The performance in IDV is easily stronger than a U.S. equivalent iShares Core High Dividend ETF (HDV), which has gained just 1% this year. However, the real momentum in equity income funds has cropped up in an unlikely place this year.
The WisdomTree Emerging Markets Equity Income Fund (DEM) is the largest ETF dedicated to dividend paying stocks in burgeoning economies such as China, Russia, and Taiwan. This fund has over $2.4 billion in total assets allocated to 300 emerging market companies with the highest yields. The holdings in DEM are dividend weighted according to annual cash payments made by each stock.
The returns in DEM have been anything but stellar over the last several years. According to fund company data, this ETF has average annualized gains of just 1.26% over the last 5 years and -4.40% over the last 3 years (through 3/31/15).
Despite that dismal track record, DEM has jumped out of the gate with a gain of 12% so far in 2015 amid strong leadership in Asia and Eastern Europe. This recent momentum is commendable, but also brings about the question of staying power. We have seen many such rallies in emerging market dividend stocks over the last three years that have ultimately fizzled.
It’s unknown if this time will be different and if high yield emerging market stocks will be able to break out of their sideways malaise.
A convincing break above the $52 resistance level would be a positive sign that things are on the right track and a new sustainable uptrend is forming.
Being early to that possibility will provide greater reward, but also higher chances of a false breakout that ultimately reverses course.