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.