What comes to mind when you think of income investing? Probably mature companies, legacy industries, developed markets (DM), and low growth.

While a traditional developed market equity income strategy still has its place in portfolios, we believe there is a compelling case for diversification into emerging markets (EM).

Once seen as offering slim pickings for dividend investors, today’s EM universe provides an incredibly varied and attractive income hunting ground as its capital markets deepen.

Dividend data

The number of EM companies paying a dividend grew significantly in the ten years from 2001–2011.1 In fact, ~90% of companies in EM now pay dividends.1

The same proportion of companies in EMs pay a dividend when compared to DMs (Chart 1).1 Perhaps more significantly, nearly 40% of companies in EMs pay a dividend over 3%.2

Chart 1. MSCI universe – Companies paying dividends

Source: FactSet, Jefferies Equity Research, January 2024.

In our view, paying a dividend signals a shareholder-driven mindset on the part of company management and a discerning approach to capital allocation.

In EM, yield doesn't preclude growth

It's not uncommon for investors to assume that because income strategies are sometimes associated with mature companies, dividend investing means missing out on growth opportunities. However, we believe that in EM this is not the case. Strong corporate fundamentals and good underlying economic growth mean dividends have grown significantly faster in EM versus DM since the early 2000’s. This has resulted in a compound annual growth rate of 12% over the last 20 years (Chart 2).

Chart 2. MSCI regions - Dividend growth since 2003

Source: FactSet, Jefferies Equity Research, January 2024. Dividend index rebased to 100 (local currency, current universe). Bottom-up aggregated with free float adjustment in a year-on-year like-to-like basis for the current MSCI universe.

Dividend delivery

Although it's well understood by many investors that income is a critical part of returns over time, this is something that may have been given less consideration in an EM context.

Nonetheless, the opportunity is just as relevant for companies in EM as it is for DM. The two components behind the MSCI EM Index’s total return over the last 22 years: price return and dividends. The dividend returns in EM since 2000 have been one of highest relative to other regions. EM, Australia, and Asia ex-Japan (AsiaxJ) have the highest dividend contribution to their total return since Dec 2000 (Chart 3).

Chart 3. MSCI regions - % local currency total returns since December 2000

Source: FactSet, Jefferies Equity Research, January 2024. Using MSCI universe as it existed in the past. Based on local currency performance. Gross reinvested dividends without considering the impact of taxes.

The price return component representing half of investor returns is dominated by earnings growth which in turn drives dividend growth. The other half of investor returns has come from the compounding effect of dividend payments.

The growth of earnings and the compounding of dividends in EM means active investors can combine dividend growth and high income, sometimes in a single stock. The superior growth characteristics of EM dividends – both from underlying growth of cash flows, plus rising pay-outs – is a trend we expect to continue.

Additionally, the coverage of dividends in EM tends to be superior, with healthier balance sheets providing further support for the growth of pay-out ratios.

Final thoughts

We believe the EM universe offers diverse income opportunities across sectors and geographies, as well as dynamic companies with the potential to generate valuable investment outcomes for clients. What’s more, the trends highlighted in this article would seem to further strengthen the investment case, suggesting the asset class might be particularly attractive for active income investors seeking a strong total return.

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  1. Jefferies, January 2024.
  2. Bloomberg, October 2023.