Investing in Emerging Markets: 2013 is Year of the Dividend ...

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 (NYSE: DEM), which is sort of the dividend equivalent of an ETF like the Vanguard MSCI Emerging Markets ETF (NYSE: 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 (NYSE: 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 (NYSE: 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%.

[Editor's Note: If you're interested in finding the best income investing opportunities at home and abroad, then you need to listen to this report from Money Morning's Martin Hutchinson. He knows that the U.S. economy and markets are headed for a low-growth future, and has created an investing strategy to survive that environment. Click here to learn more.]

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Source: http://moneymorning.com/2012/10/08/investing-in-emerging-markets-2013-is-year-of-the-dividend/

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