At a time when many S&P 500 members are subjecting investors to dividend pain, some investors may be apt to turn their back on emerging markets income strategies. However, when a plan is executed properly, emerging markets remain a compelling value proposition with potent income potential.
The Emerging Markets Multi-Factor Model Portfolio, one of the portfolios available in WisdomTree’s Modern Alpha Building Blocks series, provides unique avenues to quality emerging markets dividends.
“This model portfolio is designed for investors with a long-term horizon looking for exposure to a broad universe of Emerging Market equities primarily using factor focused ETFs,” according to WisdomTree. “The selected ETFs provide certain factor tilts that have the potential to generate excess return relative to comparable cap-weighted benchmarks over longer-term holding periods. The strategies may use both WisdomTree and non-WisdomTree ETFs.”
Emerging markets have always given investors another look at the global growth landscape, particularly since they could be in different economic phases—for example, the U.S. could be reaching a peak while an emerging market country could be in a growth acceleration phase. Adding dividends to the mix can reduce some of the volatility associated with assets in developing economies.
The WisdomTree Emerging Markets Dividend Growth Fund (DGRE ) is one of the components in the Emerging Markets Multi-Factor Model Portfolio. DGRE follows the WisdomTree Emerging Markets Quality Dividend Growth Index, which relies on a forward-looking methodology rather than yield or dividend increase streaks to weight components.
Fortunately, dividends, particularly those with dependable track records of growth, can stem some of the volatility that could accompany an emerging markets pullback.
Another perk with DGRE is that it’s not heavily allocated to commodities-exporting countries or the related sectors. China, the largest emerging markets dividend payer, commands almost 31% of DGRE’s weight and tech-heavy Taiwan and South Korea combine for almost 23%.
Speaking of technology, DGRE allocates 18.24% of its weight to that sector. That’s high compared to many US-focused dividend ETFs and one of the highest such allocations to technology stocks among all emerging markets dividend funds.
Additionally, emerging markets central banks are responding to the coronavirus pandemic with a monetary stimulus of their own, including a spate of interest rate cuts that are depressing yields on some risky bonds. All that points to DGRE’s 3.05% dividend yield looking more attractive in the current environment.