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Emerging Market Dividend Stocks Give Investors the Best of Both Worlds

In today's market, dividend investing is the best way to achieve a decent income stream without taking on too much risk.

On the other hand, this is also true: emerging markets give investors the benefit of the world's fastest economic growth.

Investors would be wise then to combine these two strategies by buying emerging markets stocks that pay steady dividends.

In practice, this is more difficult than it ought to be – but it's not impossible.

In fact, as you'll learn later I have found numerous ways to profit from this best of both worlds strategy.

What You Need to Know About Emerging Market Dividend Stocks

Dividend-paying stocks in emerging markets have the same advantages as they do in the U.S. market.

Just like here in The States, a sizeable dividend from overseas is not only money in your pocket, it's also evidence that the management is working in your interests as a shareholder.

And by paying dividends investors can be sure that at least some of the earnings the company is generating are real and not the result of an accounting flim-flam.

If a company in a fast-growing emerging market is able to pay a decent dividend and participate in local growth, then you can anticipate very good returns indeed, since the dividend itself is likely to grow on the back of the company's rapidly increasing profits.

Of course, there are always risks in emerging market investing, but a good yield gives your holding a solidity that isn't present in companies with mere paper earnings.

But here's what you need to know… If you're investing in foreign dividend-paying companies directly, you should do so in a taxable account.

Most countries impose a withholding tax of 20% or so on the dividends paid to U.S. recipients before you receive them.

In a taxable account, these foreign withholding taxes often (but not always) give you a credit against your payable U.S. taxes.

In a tax-free retirement account, which is the most sensible place for most investments, there is no U.S. tax against which the withholding tax can be offset, and so the yield to you is correspondingly reduced.

How to Choose the Right Emerging Market Dividend Stocks

Another problem with investing in emerging market dividend payers is that many of them, particularly those located in countries where bank finance is expensive, prefer to retain earnings and thereby reduce bank debt rather than pay dividends.

The Brazilian Petrobras (NYSE: PBR), for example, pays out only 5% of its earnings in dividends, giving investors a yield of only 0.5%.

Another example is America Movil (NYSE: AMX).

The Mexican mobile telecom company is the basis for Carlos Slim's world-leading fortune. America Movil pays out only one sixth of its earnings and yields just 1.1%.

Conversely, in Taiwan, companies gain tax benefits by paying out 80% of their earnings in dividends.

As a result, some Taiwanese companies have high dividend yields, although the really juicy ones tend to occur when the semiconductor cycle is favorable, which it currently is not.

Still, even at a mere 2.9% yield, Taiwan Semiconductor (NYSE: TSM) is worth considering.

Two Ways to Create an Emerging Market Income Stream

Since many of the better paying companies are not listed on U.S. exchanges, the most efficient way to buy emerging market dividend stocks is through a fund.

The largest and most solid of these is the WisdomTree Emerging Markets High Yielding Equity ETF (NYSE: DEM).

This fund has total assets of a chunky $2.7 billion and an expense ratio of 0.63%. It also has an attractive yield of 4.12%, which is highly competitive with even the longest-term Treasury or agency bonds. The fund's P/E ratio is a modest 11 times earnings.

The fund has 280 holdings with a good range of emerging market exposure – 21% in Brazil, 20% in Taiwan, 9% in South Africa, 8% in Malaysia, and 5% in Chile.

In terms of sector exposure, finance represents 27% of the fund. But not to worry — this is less of a problem in emerging markets, where the follies of Western banking are only mildly apparent!

Other industries include telecoms at 20% of the fund, IT at 13%, and materials and utilities each at 10%.

Alternatively, if you're feeling adventurous and looking for high-yielding exotica, try Kumba Iron Ore (PINK: KUMBF).

It's one of the largest companies you've never heard of.

Kumba has a market capitalization of $23 billion, and is the iron ore mining subsidiary of Anglo American, the well-known South African mining group.

The company just reported a 19% jump in 2011 earnings. Yet the stock is trading at only 10.6 times trailing earnings, with earnings per share (EPS) expected by analysts to increase another 10% in 2012.

It has declared a final dividend of 22.50 South African Rand ($2.91 at today's exchange rate), which is expected to go ex-dividend in March. And in August 2011 it paid an interim dividend, for a total of ZAR44.20 ($5.72 approximately), a yield of 7.6% currently.

With iron ore prices strong on continued Chinese growth, KUMBF looks like an interesting buy, and is not overpriced.

Either way, income investors would be wise to look into emerging market dividend stocks.

They really are the best of both worlds.

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Join the conversation. Click here to jump to comments…

  1. mario franco | February 16, 2012




  2. DONSTEVEOGIDA@GMAIL.COM | February 16, 2012

    Am really interested in the emerging merket dividend stocks,please when you are sending me the picks they should be more ellaborate as you did in that of facebook.

  3. Dave Miller | February 17, 2012

    If someone invests in an emerging markets mutual fund like WisdomTree Emerging Markets High Yielding Equity ETF (NYSE: DEM), does one still have to worry about the 20 percent withholding some foreign governments apply to dividends from U.S. investors?

  4. maria de bianchi | February 18, 2012

    if your readers invest e.g. in WisdomTree Emerging Markets High Yielding Equity ETF (NYSE: DEM) or Kumba Iron Ore (PINK: KUMBF) how will they be able to find the follow up and news? I am a Money Map report subscriber but the reccomandation I receive from you are sooo many that I have a hard time following up. Please advise. thanks dr. de' Bianchi

  5. STEVE OGIDA | February 20, 2012

    Hello mr. Williams,
    the stock broker i trade with did not include wisdom tree (NYSE:DEM) among the list of ETFs tools that they have.Please can you advise on what to do here?hope to hear from you as soon as possible.
    yours faithfully
    Steve Ogida

  6. Dan Milgrom | February 24, 2012

    I like closed end funds IAE and IHD. Yields pn these are in the 8 per cent range. Premium is a little steep for IAE but reasonable for IHD.

  7. enthusceptic | March 21, 2012

    This is fantastic, more please!
    There seems to be a need for info about the "mechanics" of investing, taxation, brokers etc. Please help us!
    Remember that many of us aren't US citizens or residents. Of course you don't don't know the tax rules in every country, but maybe you can point out similarities?

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