In his Jackson Hole speech last week, Federal Reserve Chairman Ben Bernanke did not give financial markets the boost many Fed watchers were hoping for, but he did highlight the appeal of dividend-paying emerging market ETFs.
Bernanke reiterated that the central bank would maintain a low-interest-rate environment, and that decision makes dividend paying securities even more attractive. Beneficiaries of this sustained policy could include such emerging market ETFs as the WisdomTree Emerging Markets Equity Income Fund (DEM, quote), the WisdomTree Emerging Markets SmallCap Dividend Fund (DGS, quote), and the SPDR S&P Emerging Markets Dividend Fund (EDIV, quote).
While the average dividend-payer on the Standard & Poor’s 500 Index yields about 2%, DEM delivers 3.96% on average, DGS shares pay an average of 3.24%, and EDIV stocks’ dividend yield averages 5.38%.
Each of these dividend-paying emerging market ETFs has performed well this year, even though growth in emerging markets such as China and India has been declining. EDIV is up 4.10% for the most recent quarter, DEM has risen by 5.54% over the same period, and DGS has increased by 8.10%.
Several factors contribute to the attractiveness of exchange-traded funds as income securities. These emerging market ETFs enable investors to diversify their exposure to expanding markets and can offer protection against currency fluctuations.
Again, thanks to the low-interest-rate environment that global central bankers have committed to maintaining, income securities can command a premium yield for investors. With the emerging markets’ middle classes still growing as Europe slips back into recession and the United States suffers from ongoing unemployment and stuttering economic growth, companies that profit from these disparities will reward shareholders the most.
Even during the worst of the Great Recession, the middle classes in emerging market countries expanded. A recent report from global consulting firm McKinsey & Co. projects that consumer spending in emerging markets will reach $30 trillion by 2025, about half the projected world sum. The highest total investor returns will be earned from companies that profit from this consumption and share the rewards though dividend incomes. Emerging market ETFs like the DGS, EDIV, and DEM are well positioned to be among the big winners.