A Possible Dividend Surprise With This New ETF

Not all new exchange traded funds have the benefit of good timing, but one that appears to is the KraneShares MSCI All China Health Care Index ETF KURE, which debuted Feb. 1.

Sure, KURE is just two weeks old, meaning it's accurate to say the jury is still out on this new ETF, but data suggest KURE could be a viable option for tactical investors looking for dividend growth in developing economies. KURE tracks the MSCI China All Shares Health Care 10/40 Index.

KURE provides exposure “to leading Chinese pharmaceutical companies which have been recipients of favorable policy and market conditions for research and development and the invention of new medicines and devices,” according to KraneShares. The ETF also has some dividend growth credibility.

Healthy Dividends

In the U.S and other developed markets, such as Switzerland and the U.K., investors are accustomed to decent yields and steadily rising payouts from the health care sector. Few investors associate Chinese health care stocks with dividends, even though China is the largest emerging market for dividends. There are reasons for investors to rethink China as a viable destination for health care dividends.

“The Chinese health care sector has delivered increasing dividends in recent years, growing from around CNY 5.0bn to CNY 7.8bn over the period between 2014 and 2016,” said Markit. “The growth in dividends in recent years was mostly attributed to higher earnings, which stemmed from demographic changes, favorable policies and the ability of companies to gain access to markets due to the expanding coverage of public health insurance.”

If dividend payments by Chinese health care firms reach or top this year's estimate, the sector there will have doubled dividends since 2014.

Consistent And Steady

Chinese health care companies typically keep payout ratios steady, meaning dividend payments are not burdening the firms — something that bodes well for KURE's dividend prospects. 

“In our study, we noted that health care companies in China generally have stable payout ratios despite the volatility in costs,” said Markit. “Companies do not deviate too far from the payout ratios in preceding years, and tend to be consistent in the proportion of earnings that is distributed as dividends.”

KURE's underlying index had a dividend yield of just 0.87 percent at the end of January, implying plenty of room for growth.

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