3 High Yields with Emerging Market Growth

Emerging markets have certainly been the place to be. In the past 10 years, the iShares MSCI Emerging Markets Index (NYSE: EEM) has returned an astounding average of +21.5% a year, compared to +5.1% for the S&P 500.

However, this outperformance has been lost on many dividend investors who have likely considered emerging markets an exotic indulgence of growth investors. But emerging markets are an increasing force on the world stage that can’t be ignored — even by income investors.

These nations represent 40% of the world’s population and already control two thirds of its industrial output. And their influence is growing. The International Monetary Fund (IMF) says emerging markets accounted for nearly all of the world’s growth last year, and they’re forecasted to grow at nearly three times the pace of the rest of the world in 2010.

Investors don’t normally associate dividends with emerging markets. Many companies in these fast growing economies have used excess cash to fund expansions rather than pay dividends in the past. But things are changing.

According to Citigroup, emerging market stocks will pay about 2.6% in dividends on average this year, compared to an average of about 2.7% from stocks of companies in the United States and Western Europe. One UBS strategist recently said that emerging market dividends could grow an average of +15.4% this year, and +17.7% in 2011.

Superior growth in emerging markets, combined with rising dividends, has led to a unique situation with emerging market dividend-paying stocks. Some of these stocks are poised to not only pay superior dividends to many U.S. stocks, but they also offer earnings growth and capital appreciation.

Here are a few stocks worth a look.

1. China Nepstar (NYSE: NPD), as the largest retail drugstore in China, is poised to profit from China’s rapidly growing middle class. The company sells items you might expect a drug store to sell — prescription drugs, over-the-counter drugs, soap, razors and toilet paper. It operates more than 2,500 stores in 64 cities across China. The stores are generally located in the very heart of Chinese middle class growth — well established residential communities in major Chinese cities.

The size of this middle class was estimated to have grown to about 80 million people in the middle of this decade. Looking ahead, the IMF has estimated this number will expand to a mind-boggling 700 million by 2020. While the vast majority of this middle class is a long way away from affording fancy cars, they can buy soap and medicine.

The stock started paying dividends in 2008, and the last regular dividend, paid in May, was $0.28 per ADR. The company also paid a special $1.50 dividend in December. The combined dividends give the stock an astounding 40% trailing yield. However, the special dividend can’t be counted on in the future, but the regular dividend still translates to a solid 6.4% yield.

2. Philippine Long Distance Telephone Co. (NYSE: PHI) is the largest telecom provider in the Philippines, serving more than 60% of the nation’s fixed lines and about 55% of the cellular market. While telecom doesn’t offer that much growth, the Philippines has been a hot market.

The Philippine economy grew at a whopping +7.9% in the second quarter, compared to +1.6% growth in the United States. Companies on the Philippine stock exchange have seen earnings growth of +23% this year, and corporate return on equity and dividends are at all-time highs. The Philippine market has soared +32% so far this year and has been the second best performing Asian market.

The stock pays two dividends a year that have totaled $4.80 per American Depository Share (ADS) — equating to a yield of about 7.5%. The company has a strong history of raising dividend payments — dividends per ADS have risen more than +600% since 2005. According to Thomson Reuters, analysts’ consensus expectations are for the telecom to grow net income by +8% in 2010.

3. CPFL Energia SA (NYSE: CPL) is the largest private power utility in Brazil, with a 13% share of Brazil’s power distribution market, and one of the largest companies in South America. The company primarily serves Brazil’s wealthiest state, Sao Paulo.

Earnings growth for CPFL is tied to increases in overall energy usage resulting from a growing national economy, as well as acquisitions. And the Brazilian economy has been on fire. First quarter GDP grow an astounding +9%, and the IMF estimates that Brazilian GDP will grow an average +7.1% for 2010.

CPFL pays two dividends per year — in May and October. The May dividend was $2.30 per share. The October dividend has already been declared and is estimated to be (depending on currency exchange rates) $2.74 per share. Total 2010 dividends of about $5.04 will translate to a solid 6.4% yield.

Action to Take –>The world of dividend paying stocks is expanding. While emerging markets are still generally riskier places to invest, they are less so than they’ve been in the past. These and other companies represent a solid way for dividend investors to add more of a growth element to the portfolio. All three companies are selling at reasonable valuations and can be purchased at current prices.

P.S. Investing in dividend-paying stocks is one of the most profitable ways to beat the market. For more on stable stocks that will grow your money with ever-increasing dividends, see Carla Pasternak’s latest course, The 5 Rules Every Income Investor Has to Know.