Not every dividend payer is created equal.

The challenge for income investors is finding a company that not only offers an attractive payout for its shareholders but can do so over the long term. Emerging market (EM) equities are increasingly exhibiting these characteristics. We explore three key developments that may help identify future opportunities:

  • Technology as a platform
  • Green transition
  • Domestic brands

Which dividend payers may provide a long-term answer?

Evidence is mounting that EMs are a fertile hunting ground for income, not just capital growth. The proportion of EM companies paying a dividend has grown significantly over the last two decades, with around 90% now doing so (and more than one-third of these yielding over 3%).1,2

The key is unearthing the companies whose dividends are sustainable over the long term.

The proportion of dividend payers in EM is comparable to that in developed markets (DM). However, the key is unearthing the companies whose dividends are sustainable over the long term: Can the business thrive and survive in both good times and bad? Does it generate healthy levels of cash flow to maintain its dividend payments (or to start payouts in the future)?

Making these judgements requires detailed fundamental analysis, but also consideration of external influences. No matter how well a business may be run, it needs to be in the right place at the right time to prosper. To do this, we’ve identified three essential microeconomic developments. Cross-sector and cross-region, these allow us to pinpoint the companies that are most capable of generating long-term shareholder income.

Chart 1. MSCI universe: Dividend-paying companies

Technology as a platform

Technology has helped transform EM from economies dominated by commodities to something more diversified. Many EM companies have embraced leapfrog innovation, adopting more advanced technologies, such as digital payments, to bypass the more conventional routes to growth. This has allowed them to catch up – or even surpass – DM competitors.

What makes growth in this new era such a powerful investment trend is that many key technologies are coming together at the same time.

We've entered a new digital era, powered by artificial intelligence (AI), affecting everything from how we travel to the way we spend our money. What makes growth in this new era such a powerful investment trend is that many key technologies are coming together at the same time. Just like a railway network requires major investment in its tracks to get trains from A to B, this new digital economy requires technology hardware to meet its demands.

For example, generative AI models, such as ChatGPT or indeed ERNIE Bot, are expected to contribute US$4.4 trillion to the global economy.3 However, this transformational innovation requires vast amounts of processing power. The supercomputer behind ChatGPT contains more than 285,000 processor cores and 10,000 graphics cards.4

Smarter technology in transport also comes with huge demand for additional sensors and components. Electric vehicles need more sophisticated chips and in greater numbers than the more conventional internal combustion engine cars.5 Autonomous vehicles require even more. Essential functions such as judging road positioning and making split-second safety decisions need large technology sets, including GPS, radar, and lidar.6

Technology hardware forms the building blocks for the new digital economy. Much of it's sourced from EM. The world’s largest semiconductor foundry is located in Taiwan. It provides high-performance chips to major global brands.

Chart 2. # of sensor chips required for different levels of autonomous driving

Emerging Asia is also home to global players, including memory-chip manufacturer and South Korean multinational major appliance and consumer electronics corporation, a Taiwanese fabless semiconductor company, and a telecommunications equipment testing specialist.

Chart 3. # of chips per vehicle in China, 2012–2022

Green transition

The agreement signed at COP28, the United Nations climate change summit, was billed as “the beginning of the end” for the fossil fuel era. While nations, companies and activists disagree over the pace of change needed to cut harmful CO2 emissions, the direction of travel points towards greener, lower-carbon energy sources. Other factors – not least Russia’s invasion of Ukraine – have forced policymakers to rethink their dependence on a handful of exporters for their energy needs.

[Emerging markets] are also the focal point as the energy transition accelerates.

There is already well-established scale and development of renewables in EM. These markets are also the focal point as the energy transition accelerates. Developments include expanding national power grids in India, exploring new technologies like carbon capture and storage, or adopting new fuel sources such as hydrogen. A prime example is electric-battery technology, which is essential for many aspects of the energy transition. Global demand for Li-ion batteries is expected to grow by about 27% annually, to reach around 4,700 GWh by 2030.7

Many of the essential materials required for greener technology, such as copper and platinum, are mined in EM countries, particularly Latin America. Demand for copper, used in solar photovoltaics, wind, grid-battery storage and more, is forecast to rise from around 25,000 kilotons in 2022 to nearly 40,000 kt by 2050.8

Chart 4. Demand for copper continues to rise

So far, investment levels significantly lag what is needed to meet ambitious net-zero emission targets. According to the most recent estimates, the cumulative investment gap to keep the global temperature rise below 1.5°C by 2050 (above pre-industrial levels) is US$150 trillion.9 With this in mind, we expect to see continued acceleration in projects over the next few years, giving EM companies a platform to flourish.

Chart 5. Cumulative investment needs per 1.5°C by 2050 scenario

A new generation of consumers

Spending power is rising dramatically in EM. Nations including India and Indonesia have seen large increases in their working-age populations. Together with fewer people having to support dependents, this is a recipe for potentially much greater economic growth.

While the precise definition of middle class can vary, median income has increased substantially across many EM countries in recent years.10 By one count, in 2024, 113 million people will enter the global consumer class, with 57% living in China and India.11

Chart 6. Rise in median inflation

This backdrop of consumption growth is a fertile hunting ground for dividend-paying companies. It stretches across several industries, including food and beverages, automotive vehicles, air travel, as well as sportswear, electrical appliances, and financial products, taking in insurance or banking.

One of the most important aspects is that consumers are expressing a preference for domestic brands over global names. This benefits some leading EM companies that have already established significant market share in their respective industries.

In China, for example, despite long-standing demand for premium imported spirits like whisky, there's still a strong market for baijiu, a Chinese liquor made from fermenting-cooked sorghum. This has boosted some of the country's leading beverage manufacturers.

Final thoughts

Taken together, these microeconomic pillars, which frequently overlap, help set the backdrop for well-run companies with established and loyal customer bases to sustain and grow their businesses. Alongside our follow-the-cash-flow analysis – focusing on companies with strong balance sheets and attractive fundamentals – we can stay alert to opportunities in cash-generative businesses that we believe can pay out sustainable and growing dividends to shareholders.

We remain watchful of companies that effectively use capital to generate a profitable income stream. Meaning they can invest internal funds to secure a competitive advantage over their peers, while leaving enough cash to provide attractive distributions to shareholders. We also often look for companies where we see potential for income in the future. Our balanced two-pillar approach (with 50% in high dividend and 50% in dividend growth) aims to capture the vast income and growth opportunity in EM.

We believe the combination of high levels of income, and sufficient capital reinvestment, should result in attractive dividend yields for shareholders and a growing yield as the business continues to expand over time.

1 Factset, Jefferies Equities Research, January 2024.
2 Bloomberg, October 2023.
3 "AI could increase corporate profits by $4.4 trillion a year, according to new research." McKinsey, July 2023.
4 "Microsoft announces new supercomputer, lays out vision for future AI work." Microsoft, May 2020.
5 "Fighting an unprepared battle – Rethinking auto semiconductor strategy in an uncertain era." Semiconductor Industry Series. Deloitte, November 2021.
6 Lidar is a method for determining ranges by targeting an object or a surface with a laser and measuring the time for the reflected light to return to the receiver.
7 "Battery 2030: Resilient, sustainable, and circular." McKinsey, January 2023.
8 "Total demand for key minerals." Critical Minerals Data Explorer. International Energy Agency, July 2023.
9 "World Energy Transitions Outlook 2023: 1.5°C Pathway." International Renewable Energy Agency, 2023.
10 Haver, March 2021.
11 "113 Million People Will Join the Global Middle Class in 2024." Visual Capitalist, October 2023.

Important information

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

Dividends are not guaranteed and a company’s future ability to pay dividends may be limited.

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed, and actual events or results may differ materially.