Some Good News For Emerging Markets Dividend ETFs

In the U.S., it is widely believed that dividend stocks, particularly consistent dividend growers, perform better than dividend offenders and stocks that do not pay dividends during market downturns. Unfortunately, that conventional wisdom has been defied in developing economies as several well-known emerging markets dividend exchange traded funds have lagged benchmarks such as the MSCI Emerging Markets Index over the past year.

The WisdomTree Emerging Markets High Dividend Fund DEM is one of the long-suffering emerging markets dividend ETFs. Down 29.5 percent over the past year, DEM currently yields 5.45 percent on a trailing 12-month basis, or more than double the comparable yield on the MSCI Emerging Markets Index.

DEM and rival emerging markets dividend ETFs have been confounded by, among other factors, speculation Russian dividend growth will be stagnant in the face of slumping oil prices and slumping commodities prices that are plaguing Brazil and South Africa. Those two countries are usually important parts of emerging markets dividend ETFs.

However, there is some good news and it comes from a source that could be viewed as surprising: Chinese banks.

“Markit’s dividend forecasting service is expecting the financials which feature in the CSI 300 index to boost their aggregate dividends by over 10.3% in the coming fiscal year to reach an aggregate CNY 319bn. This is over twice the pace of growth seen by Chinese blue chip stocks as the aggregate dividend payments made by the index’s constituents is only forecasted to grow by 5.3% over the same period of time,” said Markit in a new note. 

This is big news for several reasons. First, China is the largest emerging markets dividend payer in dollar terms. Second, the bulk of those payments come courtesy of Chinese banks. As it pertains to DEM, dividend growth from Chinese banks is significant because China is the ETF's second-largest country weight at 14.6 percent and financials are the fund's largest sector weigh at 24.3 percent.

DEM has more than triple the exposure to Russian stocks than is found in the MSCI Emerging Markets Index, a good thing when oil prices are rising, but not so much when the opposite is true. However, DEM has been hampered by a combined overweight to Brazil and South Africa, two markets that have struggled due to sagging currencies and slumping commodities demand.

However, investors should note low beta Taiwan is DEM's largest country allocation at 24.4 percent. But when it comes to Chinese dividends and their contributions to broader emerging markets payout growth, it is, almost, all about banks.

“This strong performance from financials means that Chinese dividends will be even more dependent on the sector’s performance, as these firms will make 60% of the total dividends payments across the index. That proportion has steadily crept up in the last four years; the sector only made 53% of all CSI 300’s dividend payments in 2012,” adds Markit.

Todd Shriber owns shares of DEM.