After years of tantalizing expansion, dividend growth is slowing around the world. In the third quarter, global dividend growth slumped 4% after rising 2.5% in the year earlier period. Dividend contraction in developing markets was a primary reason for the slump.
“In local currencies, payouts fell 0.3% around the world, with emerging markets down 7.7%, their third consecutive quarterly decline,” according to Barron’s.
Broadly speaking, 2016 has been a renaissance year for emerging markets equities and the relevant exchange-traded funds, a sentiment that extends to emerging markets dividend payers. While the asset class has retreated in the wake of Donald Trump’s surprising victory in the U.S. presidential election earlier this month, these ETFs, including emerging markets dividend strategies, have been solid performers this year.
That after being portfolio poison for several years.
In fact, last year was particularly troubling for them as emerging markets dividends were stung by myriad factors, including payout cuts and suspensions by major Chinese banks earlier this year, as well as speculation that sagging oil prices would prompt Russian oil producers to pare payouts.
Although the outlook is not perfectly sanguine at the moment — it rarely is — emerging market dividends are still worthy of places in income investors’ portfolios. Those hunting for EM dividends should be selective, and the following three ETFs could be good starting points.
Great Emerging Markets Dividend Stocks: Colombia EM Quality Dividend ETF (HILO)
Expense ratio: 0.85% annually, or $85 on a $10,000 investment.
12-month yield: 2.6
Although it is over five years old, the Colombia EM Quality Dividend ETF (NYSEARCA:HILO) is often overlooked in the EM dividend ETF conversation. However, there are a few data points that suggest HILO is worthy of closer examination.
That is assuming investors can get past the fee, which at 0.85% per year is pricey.
HILO offers investors one of the more unique approaches to emerging markets dividends on the market today. For example, this ETF departs from the standard fare of being heavily allocated to large-caps from Brazil, China and, in some cases, Russia. HILO’s 50 holdings have an average market value of just over $18 billion, which puts it at the higher end of mid-cap territory.
In a departure from the norm among these dividend strategies, HILO’s largest country allocation is 18.2% to Thailand, more than triple the ETF’s weight to Chinese stocks, according to issuer data. Russia is not represented among the 12 countries found in HILO’s geographic lineup.
HILO is up over 10% year-to-date, but over the past two years, this EM dividend ETF has lagged the MSCI Emerging Markets Index by 350 basis points. With nearly 28% of its weight dedicated to Brazil and South Africa, commodities prices and the dollar are issues for investors to mull before buying in.
Great Emerging Markets Dividend Stocks: Legg Mason Emerging Markets Low Volatility High Dividend ETF (LVHE)
Expense ratio: 0.5%
12-month yield: Not yet available
The Legg Mason Emerging Markets Low Volatility High Dividend ETF (BATS:LVHE) is the youngest member of this list, having debuted in mid-November. Youth aside, this emerging markets dividend ETF marries two of this year’s most prominent factors: low volatility and high dividends.
LVHE follows the QS Emerging Markets Low Volatility High Dividend Hedged Index, which has some caps investors should note. For example, that benchmark limits sector weights to 25%, country allocations to 15% and no single stock accounts for more than 2.5% of the new EM ETF’s weight.
“The index screens for profitable companies that have the potential to pay relatively high sustainable dividend yields,” according to Legg Mason. “Yields of the remaining securities are then scored higher or lower based on the attractiveness of their price and earnings volatility.”
This EM dividend ETF holds 143 stocks, including heavy state-owned enterprises representation by way of Chinese banks and Russian energy producers, among others.
Great Emerging Markets Dividend Stocks: iShares Emerging Markets Dividend ETF (DVYE)
Expense ratio: 0.49%
12-month yield: 4.6%
The iShares Emerging Markets Dividend ETF (NYSEARCA:DVYE) is a compelling option among emerging markets dividend ETFs for investors who focus on yield. DVYE’s trailing 12-month dividend of 4.6% confirms as much.
DVYE, which tracks the Dow Jones Emerging Markets Select Dividend Index, trades at a noticeable discount to the MSCI Emerging Markets Index. This EM dividend fund sports a price-to-earnings ratio of just 9.5 and a price-to-book ratio of 1.46, according to issuer data.
With financial services stocks accounting for almost a quarter of this EM ETF’s weight, DVYE is somewhat typical in that regard, but its 14.6% weight to technology names is large relative to competing strategies.
The geographic lineup is not surprising. Taiwan, one of the steadiest emerging markets dividend destinations, and China, the largest EM dividend payer in dollar terms, combine for 43.3% of the ETF’s weight.
At the time of this writing Todd Shriber did not own any of the aforementioned securities.