Rapid growth is a common feature across many emerging market stocks, but what investors might be overlooking is the potential for decent income in the regions as the world’s economic centre of gravity starts to shift.
Asia Pacific ex-Japan, for example, has a wealth of companies offering decent dividends. According to recent research by asset management firm Liontrust, there are some 115 emerging markets companies in the MSCI World Index alone rewarding their shareholders with dividends.
Driving this trend are a number of factors. Firstly, companies in these markets are starting to mature, which means they can start giving back some of their profits to shareholders rather than pumping all earnings back into the business to generate more growth. Corporate governance is improving too, and with this a recognition that treating shareholders well tends to make them more loyal investors.
“Equity income investors are generally conditioned by their experience of dividend yield investing in developed markets, which are typically not growth markets,” says Mark Boulton, manager of the four-star rated Pictet Global Emerging Market High Dividend fund. “Investing in emerging markets dividend-paying companies is completely different."
For investors who want to explore this burgeoning area, we asked fund managers to name some of their favourite emerging markets dividend stocks,
Samsung (005930)
South-Korean manufacturer Samsung is an industry leader in technology, competing with giant Apple in the production of smartphones and computers. The semiconductor industry has consolidated down to a handful of players in recent years, driving profitability among those survivors.
Samsung is benefitting from the latest trends, which continue to fuel rising demand for semi-conductors globally. Among those the 5G rollout, autonomous driving and the Internet of Things (IoT), which refers to the billions of physical devices around the world that are now connected to the internet and to each other, collecting and sharing data.
Boulton invests 2.26% of the Pictet Global Emerging Market High Dividend fund in the stock, which yields 2.41%; he particularly likes that the company has pledged to pay out 50% of its earnings after expenses to shareholders.
Morningstar analysts rate the company with three stars because its shares are trading within a range they consider fairly valued. “We believe Samsung’s semiconductor business will remain the profit driver in the longer term, driven by the robust growth of data traffic," says Morningstar analyst Kazunori Ito.
Taiwan Semiconductor Manufacturing (2330)
Taiwan-based TSMC makes cutting-edge chips for customers based on their own circuit designs. Although the stock yields a healthy 3.75%, Morningstar analysts rate it only two stars, believing shares to look slightly overvalued. However, it does have a narrow Moat Rating because of its superior cost advantages, which few manufacturers rival.
Mark Williams, invests 3% of his four-star rated Lionstrust Asia Income fund in the company and 25% in the tech sector as a whole. He has high conviction in data-consumption-related businesses, with global data consumption is expected to quadruple by 2024.
Two similar positions in his portfolio are connector supplier Lotes (3533) and system assembler Wistron (3231), which yield 2.5% and 5% respectively.
Sberbank of Russia (SBER)
Within the financial sector, Sberbank is one of the best dividend payers in the emerging market world. It’s the biggest bank in Russia, historically the savings bank of the Russian people - "Savings Bank” is a literal translation of the company's name - and it currently yields around 6%.
“Overall, this is an excellent and high-return bank, with good quality management yet still trades at a reasonable price,” says Boulton. He thinks that the Russian economy is turning around and expects sanctions-related risk to decline. The stock is not covered by Morningstar analysts.
Lukoil (LKOH)
Another pick from the Russian stock market, Lukoil is an oil and gas company and has been steadily increasing the amount of capital it returns to shareholders over the past 10 years. It now offers a dividend yield of 5.39%.
Richard Garstang, co-manager of the four-star rated Overstone Global Equity Income, is particularly keen on the firm after it recent announced a new dividend policy where it will pay out at least 100% of its free cash flow - free cash flow generation has improved significantly after a period of investment and this is now being returned through both dividends and share buybacks. “In addition, we are aligned with management given they own 40% of the company - an important governance consideration in a market like Russia," he says.
Xinyi Glass (XI9)
China’s largest producer of float glass, automobile glass and construction glass, Xinyi derives the majority of its revenues from float glass segment of its business. Float glass is a sheet of glass which is made by being floated on a sheet of molten metal - it is used in buildings, cars and furniture to name just a few.
William Hanbury, manager of the three-star rated Waverton Asia Pacific, likes this company which delivers a 5% yield, because it benefits in some of the biggest trends in China, such as the construction of new homes. The growing domestic demand for glass means China is now not only a producer of glass, but also a major consumer.
Yue Yuen Industrial (YUE1)
One of the world’s largest manufacturers of branded footwear, Yue Yuen makes products for the likes of Adidas, Nike, Converse and Timberland among others. "The business is expanding in Asia and benefiting from the broader trend of more people wearing athletic shoes," points out Garstang.
The company, whose shares yield around 6.6%, is currently investing to further automate its manufacturing process, which will help maintain its position as the lowest cost producer in the industry.
Corporacion Inmobiliaria Vesta (VESTA)
Elsewhere in the world, Vesta provides a compelling real estate opportunity in Mexico. The company focuses on the development and leasing of industrial buildings and distribution centres in Mexico, serving aerospace, automotive, medical devices and other industries.
With shares currently yielding a healthy 3.77%, the company has recently unveiled a five-year growth strategy with ambitious but achievable targets, according to Boulston. “We like the stock because as well as being attractively valued, it is highly cash generative and is able to invest in growth whilst still maintaining a very attractive yield," he adds.
