Emerging markets join the dividend race

Mon Mar 12, 2012 3:05am EDT
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By Sujata Rao

LONDON (Reuters) - Global investors in search of high-dividend equity plays are heading to emerging markets, abandoning their view of these stocks as a predominantly growth-based investment.

It marks another milestone in the sector's global coming of age.

The trend is part of a broader shift that is recasting equities as yield-bearing, income-providing assets -- natural at a time when U.S. Treasury yields have collapsed to near-zero but world stocks still carry dividend yields of around 3 percent.

Emerging equities were not until recently part of income seekers' horizon as companies in the developing world have generally preferred to use profits to grow the business rather than give them to shareholders. Hence the perception that EM investments will offer share price gains but little income.

But a flurry of fund launches over the past year testify to a distinct shift, not just in investor attitudes but also in emerging companies' dividend policies.

This year, emerging companies will pay 35 percent of retained earnings as dividends, Thomson Reuters data shows. That is a third above 2000 levels and in South Africa or Taiwan, payout ratios will be as high as 45-50 percent.

This has pushed emerging dividend yields - the ratio of dividends to the share price - to 2.6 percent, just below the developed market average. In some markets it is a lot higher.

"People are realizing you can actually get decent income in emerging markets, an area you didn't normally associate with income," said Julian Mayo, who manages an equity income fund at specialist emerging markets investor Charlemagne Capital.   Continued...

A dealer on the trading floor of IG Index works in London May 7, 2010. REUTERS/Paul Hackett