Emerging Markets Dividend ETFs Continue Emerging

The U.S. is not the only market offering dividend growth to income investors. Last year, global dividend reached $1.03 trillion with $1 of every $7 of that total coming courtesy of developing world companies.

Since 2009, emerging markets payouts have more than doubled and the trend of developing world dividend is continuing again this year. Despite the adverse impact of currency weakness, WisdomTree’s Emerging Markets Dividend Stream rose 1% from its May 2013 rebalance to its most recent rebalance at the end of September.

China remains the largest contributor to the WisdomTree Emerging Markets Dividend Stream with $31.8 billion worth of dividends representing growth of nearly 18% from the May 2013 rebalance. China’s dividend growth has been crucial to the WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM), an ETF that overweights Russia, which has been a thorny trade this year. [China’s Dividend Growth Story]

Much of China’s dividend growth is attributable to its goliath financial services firms. DEM, which sports a distribution yield of over 11%, allocates 18.5% of its weight to China and features three Chinese banks among its top-10 holdings.

Regarding Russia, the country’s contribution to the WisdomTree Emerging Markets Dividend Stream is $21,8 billion, down 5% from the previous rebalance, according to issuer data.

“With the seemingly ever-present geopolitical uncertainties, Russia is never far from anyone’s mind when thinking about emerging markets. In local currency terms, Russian constituents exhibited the fifth-highest dividend growth rate (behind Brazil, South Africa, China and the Philippines). However, since the ruble depreciated nearly 20% over this period, in U.S. dollar terms, Russia’s dividends actually fell,” according to research by WisdomTree’s Jeremy Schwartz, CFA, Director of Research, Christopher Gannatti, CFA, Associate Director of Research, Tripp Zimmerman, CFA, Research Analyst & Eswarie Subrahmanyam S. Balan, Research Analyst.

In the wake of economic sanctions from the West, Russian dividends are seen as vulnerable heading into 2015.

Markit expects Russian energy names to pare dividends by 6% while forecasting a 14% drop in payouts by the country’s financial services firms. Markit said it expects that the only major Russian companies affected by Western sanctions that will boost payouts next year are Lukoil and Novatek. Last week, JPMorgan Chase sounded a bearish tone on OAO Gazprom and OAO Rosneft, Russia’s two largest oil companies, citing dividend concerns. [Going the Wrong Way With Russia ETFs]

Gazprom and Rosneft combine for over 8.4% of DEM’s weight and are the ETF’s largest and third-largest holdings, respectively. Those stocks, along with Chinese banks, are inexpensive.

“The largest payer of cash dividends in the EM Dividend Index-China Construction Bank- had a dividend yield of 7.0%. The average dividend yield across these top 10 firms was nearly 6.5%. Measured against the dividends that they pay, these firms currently look very inexpensive,” according to WisdomTree.

Perhaps due to just a 6.4% weight to Russia, the WisdomTree Emerging Markets Dividend Growth Fund (NasdaqGS: DGRE) has been a decent performer this year, gaining 1.4%. DGRE focuses on emerging markets firms with a solid earnings growth as a sign of quality and dividend growth potential. [Dividend Growth in an Emerging Markets ETF]

Although the South African rand and Brazilian real have traded lower against the U.S. dollar since May 2013, dividend growth in those countries has still been positive in dollar terms, an important factor because South Africa and Brazil combine for nearly 34% of DGRE’s weight.