Treasury bond yields in the U.S. are back near lows, as the Fed Taper appears to be off the table for the time being. This is of course after a string of poor data points which suggest that the economy might not be as strong as we initially thought.
As a result, many income oriented investors now look for companies with solid balance sheets that pay stable dividends. But many domestic dividend paying companies are mature and large, and thus do not offer the growth potential shown by some newer, smaller companies.
An attractive option for such investors is to pick Emerging Market Dividend ETFs that combine the opportunity to benefit from the higher growth potential in the emerging markets with the steady flow of dividend income.
Emerging markets under the microscope
Emerging markets currently represent about one-third of global GDP and their share will continue to grow in the coming years. The emerging economies have been beaten down this year due to macroeconomic and political concerns in India, the property market in China, and persistent inflation and interest rates hike issues in Brazil.
Additionally, most of these nations are commodity-centric economies that make them highly susceptible to any downtrend in the global economy. Further, currency declines against the greenback have hit hard both equity and debt markets in the emerging economies, adding to their woes.
Despite these weak fundamentals, emerging market ETFs ought to be part of any investment portfolio. The International Monetary Fund (IMF) projects that the emerging economies will grow 5.9% in 2013 compared to 1.9% for developed countries and 2% for the U.S. These nations could be interesting plays in the future as their valuations are quite favorable at the current levels.
Further, many emerging market companies often offer a higher rate of dividend yield compared with the domestic companies (read: Are There Really High-Dividend, Low-Risk ETFs?). There are now some quality choices in emerging markets that can provide investors with outsized payouts on a regular basis.
In particular, there are five great choices in this space focusing on high dividend paying stable companies in emerging markets.
WisdomTree Emerging Markets Equity Income Fund (NYSEARCA:DEM)
This fund tracks the WisdomTree Emerging Markets Equity Income Index, which measures the performance of the highest dividend yielding stocks selected from the WisdomTree Emerging Markets Dividend Index.
With a total of 237 stocks in its basket, the product is widely spread across individual securities with just 32% of its assets in the top 10 holdings. The top three firms – China Construction Bank, Gazprom and Industrial & Commercial Bank – comprise about 16.72% of the combined share in the basket.
The fund is heavy on financials, closely followed by energy, materials and telecommunication services. In terms of country allocations, Taiwan is at the top (20%), followed by China (16.3%), Russia (11.9%) and Brazil (11.4%).
The product appears rich with AUM of about $5.2 billion and average daily volume of more than 760,000 shares. The ETF charges 63 bps in fees per year from investors. The fund has lost about 7.5% year-to-date but has an annual dividend yield of 3.00% versus the average US dividend yield of about 3.5% (read:4 Excellent Dividend ETFs for Income and Stability).
WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEARCA:DGS)
The fund tracks the WisdomTree Emerging Markets SmallCap Dividend Index that is primarily composed of small cap stocks selected from the WisdomTree Emerging Markets Dividend Index. It holds over 500 securities in the basket and offers wide diversification as it puts little in each security.
None of the securities holds more than 1.25% of the assets, eliminating company-specific risk. In terms of sector exposure, financials take the top spot with roughly one-fourth of the assets, while industrials, consumer discretionary and materials rounded up to the next three spots in the basket.