News Analysis date published New: 
Friday, September 7, 2012 - 10:30
New Date created: 
Friday, September 7, 2012 - 12:56
New Date last updated: 
Friday, September 7, 2012 - 10:30

Get Emerging-Market Exposure and a Nice Yield in One Single Investment

Friday, September 07, 2012 10:30 AM

Income-producing securities have a certain appeal you just don't get from stocks that don't provide any sort of scheduled payout. With dividend-paying stocks, you know you're going to get a regular return on investment even if the economy is bad or the markets go south.

Most investors probably associate dividend-paying investments almost exclusively with developed economies like North America and Western Europe. But they could be missing out on some very attractive income opportunities in developing regions such as Asia, Latin America, Eastern Europe and Africa.

It may be hard to believe, but tantalizing dividends are available in parts of the world that are better known for rising, but very choppy, equity markets. Even better, I've found an investment that gives investors broad exposure to all the best dividend-paying stocks developing economies have to offer. Not only is it less volatile than a typical emerging-market investment, but it sports an attractive dividend yield of 4%.

I'm referring to WisdomTree Emerging Markets Equity (ARCX: DEM) -- just the sort of investment you might hear about from StreetAuthority co-founder Paul Tracy in his High-Yield International newsletter.

Specifically, this exchange-traded fund (ETF) tracks the top 30% of holdings in the Wisdom Tree Emerging Markets Dividend Index, a benchmark composed of about 1,000 dividend-paying stocks on major exchanges in 19 developing countries. Because the index is weighted by annual cash dividends and not dividend yield, it's tilted toward very large companies with attractive valuations.

For instance, shares of the major Chinese commercial bank China Construction Bank Corp. (OTC: CICHY), which make up 7% of DEM's portfolio, currently trade for only 5.8 times earnings of $2.20 per share. The annual dividend of $0.54 a share is good for a yield of 4.2%. OAO Lukoil (OTC: LUKOY), a Russian energy giant that makes up 2% of the fund, is trading at just four times earnings of $13.41 per share. The stock is yielding 3% based on a dividend of $1.70 a share.

The orientation of WisdomTree Emerging Markets Equity toward large, underpriced companies with strong dividends has undoubtedly contributed to the fund's long-term outperformance. As the table below shows, it has far outpaced its typical peer in the emerging-market category since inception in July of 2007.

The fund also has an advantage in terms of risk, as measured by standard deviation -- the amount of price variability during a specific time period. Indeed, the fund has a three-year standard deviation of 19.8, meaning its price typically fluctuated up or down by as much as 19.8% during the past three years. It is an emerging-market fund, after all, so it can be quite turbulent. Still, its risk profile looks better than the typical peer, which has a standard deviation of 22.1, and is even pretty comparable to the S&P 500's standard deviation of 16.

Besides the two stocks I've mentioned, DEM's top five holdings include another big Russian energy company, OAO Gazprom (OTC: OGZPY), the massive Brazilian mining firm Vale SA (NYSE: VALE) and the large Brazilian bank Banco do Brasil SA (OTC: BDORY). Overall, allocations by asset class are 78% large-cap stocks, 16% mid-cap stocks and 6% small-cap stocks. According to the fund's latest annual report, country and industry sector weightings are as follows:

Risks to Consider: As you may have noticed, WisdomTree Emerging Markets Equity doesn't invest much in the world's largest emerging economy, China. Indeed, the fund's 2.8% exposure rate is roughly one-seventh of its typical peer. Such underexposure could be a hindrance since China may show much better-than-average growth for many years.

Action to Take --> As a group, emerging markets have trailed the U.S. stock market for quite some time, in large part because of the economic turmoil of the past four years, which has dramatically reduced investors' risk tolerance. But emerging markets could provide the best rates of return going forward and I think WisdomTree Emerging Markets Equity is the best choice for broad exposure to those markets.

Although the fund's minimal exposure to China could hurt performance, I don't think it will have a significant effect on the portfolio in the long term. Many countries in the fund have such close economic ties to China that the fund should benefit from continued growth of China's economy anyway.

[Note: For more information about international dividend stocks, I invite you to read Paul Tracy's latest presentation, where he's included names and tickers symbols of many other high-yield international plays. Visit this link to learn about these stocks now.]

Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.