At the same time, investors who were willing to broaden their horizons beyond the traditional sources have been well rewarded with exceptional dividend growth and superior total returns.
As well as a source of return, dividends are also a strong indicator of corporate behaviour. Their impact is even greater in volatile times or periods of low capital appreciation. When prices are negative, dividends are the only source of return.
The number of dividend payers in emerging markets has grown steadily over the past decade and now exceeds 700. The equivalent number when you add the UK and Europe together (historically the richest source of dividends) is just over 400. More importantly, in terms of proving a commitment to dividends, if you count the numbers of companies with an unbroken record of dividend payment over the past five years the number is more than 500 in emerging markets, while the equivalent number across the UK and Europe is only 348.
The point of this is to show the diversity of dividend availability and the potential for a well diversified, and hence lower risk, portfolio. It is no longer necessary to expose income investors to the very high levels of stock specific risk and regional and industry concentration that have brought unnecessary volatility in the past.
Investing in high quality, high dividend payers in emerging markets improves returns and reduces risk. But why?
Better quality of information:
Dividends are a tangible guide to the financial health of a business and unlike earnings statements cannot be altered through accruals or accountancy practices. If the cash is not there the dividend cannot be paid.
Better corporate governance:
Corporate governance is typically associated with higher dividend payouts. When shareholders are well protected either by governments or corporations themselves, then capital can be allocated more efficiently leading to better profitability.
Better capital efficiency and financial discipline:
Unlike Western companies, emerging market companies are mostly overcapitalised and underleveraged. While this is great if the sole focus is on dividends, from a total return perspective lowering the level of retained earnings through dividend payout can improve the return on invested capital.
Avoiding excessive volatility:
Over the past decade emerging market volatility was on average 32.5% versus 23.5% for developed markets. Deviation around the average was also considerably higher and a careful analysis of the most extreme negative months is not for the faint hearted. High dividend paying stocks are in general a lot less volatile.
Better valuations:
Buying shares that are delivering good yields means that the price you pay to take advantage of the higher emerging market growth rates is always good value. The recent sell off means investors who buy in now will be protected by extremely low valuations.
