Money Morning Staff: In August 2012, a record $34 billion in dividends was paid to investors, topping the previous record of $32.1 billion set in November 2011.
September was not too shabby either in terms of dividends and payout increases. At this point it is fair to say 2012 will prove to be a very favorable year for income investors.
Indeed, U.S. companies are parting with their cash in the name of rewarding shareholders. That includes the usual suspects among dividend champions such as The Coca-Cola Co. (NYSE:KO), The Procter & Gamble Co. (NYSE:PG) and other blue chips.
However, with 2013 knocking on the door, now might be the time for investors to make an early New Year’s resolution to expand their dividend stocks exposure.
That’s because emerging markets equities are climbing the dividend ladder as we speak.
Research from UBS indicates the 300 largest non-financial firms in the MSCI Emerging Markets Index are expected to pay $52.2 billion in dividends this year, up from $48.9 billion, according to The Financial Times.
Translation: The time has come to consider investing in emerging market dividend stocks.
Why Emerging Markets Can Offer More Than the U.S.
By “emerging market dividend stocks” we do not mean U.S. or European multinationals such as Coke that derive a decent percentage of their revenue from developing nations. We mean companies actually based in developing nations.
Dutch bank ING confirms that for dividends, it’s advisable to play emerging markets directly, noting “from a purely dividend yield perspective, investors can consider increasing their exposure to home grown companies here.”
The bank also notes that the emerging markets universe yields about 3%, which is better than how investors will be treated with the S&P 500, or Japanese stocks.
Another issue to consider is dividend growth. Simple math dictates that, over time, targeting growing dividends is an efficacious strategy for patient investors.
While the yields on names such as Coke, P&G and Johnson & Johnson (NYSE:JNJ) are fair (investors can certainly do better in and outside of the U.S.), the real reason why these stocks are so beloved is these companies raise their dividends almost every year. Investors love that dependability.
Coincidentally, it is the dividend-growth theme that makes investing in emerging market dividend stocks so alluring.
In 2012, “emerging market companies will pay 35% of retained earnings as dividends, which is a third higher than in 2000,” according to ING.
Of course, there are elevated risks compared to U.S. and developed market equities, but that is the lay of the land in the developing world. There is no such thing as a free lunch in the financial markets, but there is some upside.
As Money Morning‘s Global Investing Strategist Martin Hutchinson noted earlier this year, “If you’re investing in foreign dividend-paying companies directly, you should do so in a taxable account. Most countries impose a withholding tax of 20% or so on the dividends paid to U.S. recipients before you receive them. In a taxable account, these foreign withholding taxes often (but not always) give you a credit against your payable U.S. taxes.”
And since most foreign companies pay their dividends in the currency of the country they are domiciled in, dividends on foreign equities act as a hedge against a weak U.S. dollar. That is something to consider given the Federal Reserve‘s penchant for dollar-destructive monetary easing.
Investing in Emerging Markets: Consider These
Stock-picking can be a tricky in the developing world, but that burden can be alleviated through the use of exchange-traded funds (ETFs).
One of the more popular options is the WisdomTree Emerging Markets Equity Income Fund (NYSEARCA:DEM), which is sort of the dividend equivalent of an ETF like the Vanguard MSCI Emerging Markets ETF (NYSEARCA:VWO). We say “sort of” because DEM’s yield is nearly twice that of VWO. That does not explain why VWO commands more attention, but DEM’s assets-under-management tally has increased by nearly 50% since February.
More adventurous souls should consider DEM’s small-cap cousin, the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEARCA:DGS). DGS is not overly risky because Taiwan and South Korea, two markets that are arguably no longer emerging, account for over 35% of the fund’s weight.
However, the fund does offer ample exposure to more exotic Southeast Asian fare such as Malaysia and Thailand while sporting a yield of over 6%.
There is one new kid on the block to consider: the iShares Emerging Markets Dividend Index Fund (NYSEARCA:DVYE). As is the case with other funds highlighted here, DVYE is heavily exposed to Taiwan (24.6%). On the other hand, China and South Korea do not loom as large in this ETF as they do in so many other emerging markets funds.
DVYE could prove useful for those investors looking to gain access to countries such as South Africa, Malaysia and Thailand without the commitment of a single stock or an ETF exclusively devoted to those nations. The fund debuted in February and now has over $42 million in assets under management and a 30-day SEC yield of nearly 4%.
We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet.And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.