Emerging markets aren’t among the first places investors typically think of when scanning for dividend stocks, but they can offer reliable and growing payers.
It’s important to tread carefully, however, given risks such as currency fluctuations and less rigorous corporate governance in certain cases.
“You can find world-class businesses in emerging markets,” says Giorgio Caputo, portfolio manager of the
JOHCM Global Income Builder
fund (ticker: JOBIX). “The countries that have gotten this right have moved up the ladder from pure manufacturing into IP,” or intellectual property—most notably technology companies. He points to companies in South Korea, Taiwan, and “increasingly mainland China” for making the leap.
The fund’s two emerging market holdings are American depositary receipts of
Taiwan Semiconductor Manufacturing
(TSM), which yield about 2%, and preferred shares of
(005935.South Korea), yielding about 2.8%.
Attractive yields can be hard to come by in emerging markets, however. About 35% of the stocks in the MSCI Emerging Markets Index yield below 0.5%, according to Tim Morris, an investment specialist at JPMorgan Asset Management. The index is down about 1% year to date, dividends included. Morris says the low yields in those markets reflect, in part, the pressure financial firms have come under during the Covid-19 pandemic, as many have been forced to cut their dividends.
For dividends, some emerging market countries offer better opportunities than others. As of Sept. 22, the top country weighting for the
iShares Emerging Markets Dividend
ETF (DVYE) was China at 21.8%, followed by Russia at 15.1%, and Taiwan at 11.1%.
Morris, whose duties include working with the portfolio managers of the
JPMorgan Emerging Markets Equity
fund (JFAMX), says dividend yield isn’t the primary hurdle for a stock to make it into the fund, but one of several factors—another being a company’s earnings-growth potential over the next five years.
One of the fund’s largest holdings is Taiwan Semiconductor. The chip maker, Morris says, has “very steady and consistent revenue streams that have been a strong tailwind.”
Another of the fund’s holdings is
Hong Kong Exchanges & Clearing
(388.Hong Kong), which yields 1.6%. “We’ve seen the dividend rising, particularly as the earning story becomes quite favorable for this exchange operator,” says Morris. The fund also holds
Wal-Mart de Mexico
(WALMEX.Mexico), which yields about 1.5%.
While there is yield available in emerging market stocks, investors need to use some caution. There is currency risk, which can depress returns for U.S. investors at times, and in certain cases, corporate governance can be a concern, says Caputo. “It’s not the first stop on the bus for an income investor,” he adds, but “you can find some great income-generating businesses in those markets.”
Something else that U.S. investors need to consider when buying an overseas stock is a dividend withholding tax imposed by a foreign country.
“The withholding rates in emerging market countries are not uniform,” says Robert Willens, who runs an accounting and tax consultancy. Some countries, he says, have modest withholding rates, such as Thailand (8%) and the Dominican Republic (10%), while others are higher, including Taiwan (20%). However, U.S. investors in many cases can take a credit on their U.S. taxes to offset some or all of that foreign withholding tax.
Taxes aside, for income investors hungry for yield, emerging markets may offer some rewards—if you can tolerate the risk.
Write to Lawrence C. Strauss at [email protected]