When tapering was first mentioned, there were almost immediate outflows from emerging markets as investors prepared for better opportunities in developed markets, and the defensive focus on dividends mostly gave way to growth stories. Ironically, the move away from EM growth stories and DM dividends missed the fact that chasing EM dividends is a completely distinct strategy that is more cyclical than most people realize.

“Dividend investing is a relatively new phenomenon in EM, whilst it has been around in DM for many a decade,” write Citi analysts Markus Rosgen and Yue Hin Pong. The main differences between dividends in emerging and developed markets are that, “first, in EM the sector distribution is much broader than it is in DM. Second, in EM the basket is less interest rate sensitive but much more growth (top-line) sensitive, which in light of accelerating growth, is a good thing.”

What Rosgen and Pong realized is that management incentives tend to be very different in emerging markets because companies are often run by the original owner, families, or the government, so dividends align the interests of minority shareholders and management. In family-run businesses, dividends are often used to keep other family members happy and in support of board decisions, while governments use dividends simply to withdraw funds for other projects.

EM dividend strategies

And unlike DM, EM dividend strategies don’t mean missing out on strong growth.

“Mention dividends and the belief is that one is bearish. This could not be further from the truth. In EM, dividend strategies have not only outperformed growth strategies but dividend strategies have also been much more growth sensitive than in DM,” write Rosgen and Pong.

Dividends

Dividends have lower volatility than EPS in EM

Rosgen and Pong say that dividends have lower volatility than EPS in EM, but investors looking to reduce their risk can also invest in emerging market ETFs that pay dividends if they aren’t interested in pursuing a stock-picking strategy. “Investors pursuing emerging-market equity investments can buttress any potential drawdowns through investments in dividend-paying equities. Moreover, they can reduce the risk of exposure to single companies through broadly diversified emerging-market ETFs,” explains dividend investment company Top Yields on Seeking Alpha.