Last year, emerging markets companies accounted for $1 of every $7 paid in dividends. Over the past five years, emerging markets payouts have doubled.
One of the primary drivers of developing world dividend growth has been China. The world’s second-largest economy is the largest emerging markets dividend payer in dollar terms, a trait that has helped keep some of the luster on otherwise disappointing Chinese equities.
Research from WisdomTree notes that of the 76 Chinese firms in the WisdomTree Emerging Markets Dividend Index, 54 recently boosted payouts. Research analyst Tripp Zimmerman points out that aggregate dividend growth for those 76 companies “was 10.7%, or an increase from $25.2 billion to $27.9 billion.”
Buoyed by increases by automobile companies Great Wall Motor Company, Guangzhou Automobile Group and Dongfeng Motor Group, Chinese consumer discretionary companies in the WisdomTree Emerging Markets Dividend Index saw dividend stream growth of 43.7%, according to WisdomTree.
Equally as important may be the 12.7% growth seen from the financial services sector, which has come under fire in China this year amid speculation of an out of control shadow banking sector and rising credit defaults. [In EM Return, Investors Skipping China]
“The top seven Dividend Stream increases were all financial firms, and the sector remains the largest dividend-paying sector within the Index. I find it impressive that, despite having the largest payers, the sector was still able to outpace the total Index growth rate. More than 80%, or 14 out of 17 financial firms in the Index, grew their dividends by a total of 12.7%, about 2% above China’s total growth,” said Zimmerman in the note.
Dividend growth from Chinese banks could be a positive going forward for the $3.86 billion WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM). DEM allocates 16.6% of its weight to China and its largest sector weight is 25.3% to financial services. [Emerging Markets Dividends Are Rising]
DEM, which has a 30-day SEC yield of 4%, features three Chinese banks among its top-10 holdings. The ETF caught some criticism earlier this year due to its country weights, which include Russia in the top spot at 18.8%.
However, it cannot be glossed over that DEM’s roughly 35% combined allocation to Russia and China makes senses because 1) This is a dividend ETF and 2) In addition to China being the largest emerging markets dividend payer in dollar terms, Russia is the fastest-growing. Plus, those are two of the least expensive emerging markets. [Russia Asserts Dividend Dominance]
Gazprom and Lukoil, two of DEM’s top-10 holdings, are expected to pay at least 15% of this year’s profits in dividends.
Getting back to China, the country’s utilities and consumer staples sectors produced dividend growth that investors have come to expect from those sectors in the U.S. Those sectors China delivered dividend growth of 42.1% and 14.6%, respectively, according to WisdomTree data. Those sectors combine for almost 9% of DEM’s weight.
“The broad-based dividend growth across size capitalization and among a majority of sectors is a positive starting point for a potential turnaround, and the price-versus-valuation divergence presents an interesting investment opportunity,” said Zimmerman.
WisdomTree Emerging Markets Equity Income Fund
Tom Lydon’s clients own shares of DEM.