Emerging markets—investing in dividend companies all along

Investors typically look to emerging markets equities for growth potential, not income. Higher-yielding stocks, by contrast, are usually associated with lower-growth prospects and old-economy sectors, such as utilities and telecommunication services companies. While the conventional wisdom may be true in developed markets, it is not in emerging markets. In fact, the majority of companies within the emerging markets equity universe pay a dividend, and the actual cash dividend has contributed a substantial portion to the total return of emerging markets equities over time. More specifically, 762 companies within the MSCI Emerging Markets Index had a yield greater than zero as of the end of August. This subset represents 91.5% of companies by name and 95.5% by market capitalization.

Given the high percentage of companies that pay a dividend, it is logical to assume that a relatively high percentage of companies within each sector also have a yield. Sector data is shown below, and not surprisingly, the vast majority of telecommunication services and utilities companies do pay a dividend. However, it is interesting to note that even in high-growth sectors such as information technology and health care, the majority of stocks also pay a dividend. This means that focusing on dividend-yielding companies does not come at the expense of growth in emerging markets.

The distribution by country follows largely the same pattern but with a few exceptions. All of the MSCI Emerging Markets Index companies within Russia, Indonesia, Chile, the Philippines, Qatar, Peru, the Czech Republic, and Hungary pay a yield. These countries are characterized by having 3 to 30 companies in the index and less than a 5% weight within the index, including a few with sub-1% positions. The 90% to 100% group includes countries such as Malaysia, Thailand, Colombia, and Turkey, as well as index heavyweights China, Taiwan, Brazil, and India. The final set includes Korea—the second-largest company in the index by market cap—South Africa, the United Arab Emirates (UAE), Poland, Mexico, and Egypt, with dividend payers accounting for 75% to 90% of all index components within those countries. The one country not included in the above groupings is Greece, where only 2 of 10 companies pay a dividend.

Dividend-yielding stocks are abundant in emerging markets and can be found in all sectors and countries. They are fundamentally different from their developed market peers, offer the opportunity for growth, and, given their abundance, likely play a large role in any emerging markets portfolio already.

In our next post, we’ll cover the primary reasons why the majority of emerging markets companies pay dividends, none of which relate to the growth profiles of the individual companies. Rather than signaling the transition from a growth to a value company, the payment of dividends in emerging markets reflects ownership structure, systematic importance, and historical precedence. For now, investors should know what they’re getting when they invest in emerging markets. What they’ve likely been getting all along were more income-oriented stocks than they may have thought.

Stephen Kinney, CFA, is a portfolio specialist with Wells Capital Management’s Emerging Markets Equity team.