Look For Emerging Market Dividend Growth - ING

Wendy Spires

4 September 2012

While the stellar capital gains of the last decade might be hard for emerging markets equities to recreate going forward, many of the region’s stocks still have a lot to offer in terms of robust dividend growth, says Manu Vandenbulck, senior investment manager at ING Investment Management.

Vandenbulck notes that some Western investors have limited themselves to investing in multinational consumer goods companies as a means to tap into the emerging markets growth story, but he believes that now they should consider increasing their exposure to emerging markets companies themselves.

As Vandenbulck points out, at a dividend yield of 3 per cent emerging markets equities are currently outstripping those in developed markets, such as the 2 per cent on offer by US names and Japan at 2.6 per cent. Furthermore, emerging markets firms are set to pay out 35 per cent of retained earnings as dividends this year – a figure which is up a third from 2000. A further point to note is that currently 85 per cent of emerging markets companies are paying dividends, compared to 82 per cent of those in developed economies.

Looking more closely at the trends underpinning the attraction of investing in emerging markets dividend stocks, Vandenbulck points to several factors, the first among which is the improved capital discipline and commitment to dividends which such firms are showing. Second is the fact that that emerging markets firms are generally less indebted than their developed world peers; many are actually amassing cash faster than they are paying out dividends, signifying both dividend sustainability and growth potential, he said.

The general robust health of emerging markets companies is well-known, but Vandenbulck also notes that many such firms are part government-owned and are therefore more likely to remain committed to paying good dividends since their government owners rely on dividends payments for the cash to meet their policy obligations.

“It is no secret that emerging market equities have been seen as attractive because of their strong capital growth potential, but increasingly the story for investing in this asset class has expanded to include dividend yield. Many of these emerging markets have ‘emerged’ and they offer some of the best investment opportunities of anywhere in the world from both a capital growth and now a dividend yield perspective,” said Vandenbulck.

While emerging markets dividends stocks are attractive on a number of fronts (including possible currency gains), Vandenbulck cautions that investors need to be careful when deciding which firms can deliver sustainable dividend growth.

“The dividend policy of many companies in emerging markets is simply based on a pay-out ratio of profits; as such dividend volatility will be as high as earnings volatility. In some countries such as Brazil and Taiwan, companies are obliged by law to pay out a certain percentage of profits in dividends,” he said. “This increases the investible universe for dividend investors in emerging markets, but does not necessarily mean these dividends are sustainable. Companies with a ‘progressive dividend policy’ are still rare in emerging markets.”