Some investors are looking outside developed markets to focus on emerging markets exchange traded funds in their quest for income in today’s low-rate environment offering paltry bond yields.

“The emerging-markets story is all about growth, the red-hot kind. Paradoxically, the best way to benefit from economic growth may be to hold boring, dividend-paying stocks,” writes Samuel Lee for Morningstar. “Emerging market exchange traded funds that provide healthy dividend yields may be a better investment for those seeking high returns instead of fast growth.”

According to a study conducted by London Business School professors Elroy Dimson, Paul Marsh, and Mike Staunton, dividends account for the majority of past market returns globally, the report said. Additionally, dividend-payers have outperformed nonpayers in the majority of sampled countries and also showed a lower sensitivity to market performance.

Morningstar’s Lee argues that investors can’t count on emerging markets producing higher equity returns forever since the correlation between market return and GDP growth is relatively weak over the long-run. A quickly-growing economy takes in capital from domestic savers and foreign investors, and old shareholders will see their stock shares diluted as the company sells more shares to bring in more capital. Consequently, the dilution will eventually result in poor returns.

Dividend stocks, on the other hand, do not issue a lot of shares since most of these companies will be large enough to give back to their shareholders. Emerging market dividend ETFs largely include Brazilian and Taiwanese stocks, telecom companies and minimal exposure to resource producers, according to the report.

  • WisdomTree Emerging Markets Equity Income (NYSEArca: DEM). DEM has a 7% yield and a 0.63% expense ratio. On a year-to-year basis, the fund selects 30% of stocks from a pre-screened list of emerging-market stocks that provide dividends and then weights the stocks by their total dividends. It should be noted that the fund holds a hefty 27% weighting in financials.
  • SPDR S&P Emerging Markets Dividend ETF (NYSEArca: EDIV). EDIV has a 8.33% yield and a 0.59% expense ratio. The fund excludes distressed firms and includes stocks with a positive cumulative three-year earnings growth, with positive per-share earnings over the last year. Morningstar analysts caution that the fund trades at noticeable discounts or premiums to net asset value.
  • WisdomTree Emerging Markets SmallCap Dividend (NYSEArca: DGS). DGS is a small-cap version of the DEM fund. It has a 5.11% yield and a 0.64% expense ratio. The fund’s top three sectors include financials 27.13%, telecom services 20.79% and info tech 11.62%.

WisdomTree Emerging Markets Equity Income

For more information on the emerging markets, visit our emerging markets category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.