Emerging Markets Dividends: A Broader Classification

While the landscape implied by the global Dividend Stream® provides useful context for global importance and can help inform allocation ideas, below we will focus on emerging markets (EM). We’ll start the discussion with analysis of the WisdomTree Emerging Markets Dividend Index, WisdomTree’s broadest measure of emerging market dividend payers.   Three factors can affect country Dividend Streams: • Organic Growth: Constituents that were already members of the Index over the prior year remain in the Index and achieve Dividend Stream growth.   • New Entrants: New constituents qualify for Index membership and increase the total number of contributing components for a particular country. Of course, this can also work the other way, in that constituents can fail to retain their membership and thereby reduce the Dividend Stream. In an effort to be more inclusive of Chinese securities, WisdomTree expanded its country classification for China from being determined strictly by the country of incorporation to either country of incorporation or country of domicile. As a result of the new China classification, 169 Chinese companies were added to the Index, with 30 being reclassified from the developed world and 139 being newly eligible.   • Currencies: A currency can appreciate or depreciate compared to the U.S. dollar. The WisdomTree Emerging Markets Dividend Index measures dividends in U.S. dollar terms, so currency performance can impact constituent weights.   While the aggregate EM Dividend Stream was down 0.7% between rebalance dates when measured in U.S. dollars, figure 1 shows just how important currency weakness was to that number on a country-by-country basis.   Figure 1: Dividend Growth Rates in U.S. Dollars & Local Currency • For the broad WisdomTree Emerging Markets Dividend Index, currencies detracted almost 18% from the year-over-year Dividend Stream growth, as the Dividend Stream in local currencies was up approximately 21%. For reference purposes, assuming the old China classification remained, the Dividend Stream would have been down more than 15.6% in dollar terms and up 2.8% when measured in local currencies.   • The Negative Impact from Currencies: Over the period, we witnessed broad dollar strength on anticipation of the Federal Reserve (Fed) lifting off from its zero interest rate policy, which put pressure on both developed and emerging market currencies. The Bloomberg Dollar Index, a broad performance measure of the U.S. dollar against both developed and emerging market currencies, was up 12.8% over the period. Two of the worst performing emerging market currencies were the Brazilian real and the Russian ruble, depreciating more than 38% and 39%, respectively, during the period. So, although dividends in those countries were relatively flat over the period, the currency impact caused the U.S. dollar Dividend Stream to contract almost 40% for Russia and 39% for Brazil.   • India, Taiwan and South Korea Rise to the Top: All countries saw more than 25% dividend growth in local terms and impressively were still able to record double-digit dividend growth in dollar terms after incorporating the negative impact from currency. Both Taiwan and India had relatively stable currencies compared to other emerging markets. Taiwan moved up a spot to earn the title of second largest dividend-paying country and represents more than 14% of the total stream. Over the past year, the South Korean government has passed reforms that we believed would encourage higher dividends, and we saw that play out over the past year. Although India’s growth rate is impressive, it is not a large dividend-paying country due to unfavorable tax rules, so its impact on the total Dividend Stream is minimal.   Incorporating a More Diversified China China stands at the top with 74% growth in U.S. dollars over this period. As a result of the expanded China classification, this includes the addition of 169 companies that had a Dividend Stream of $27.5 billion. For comparison purposes, assuming the old China classification remained, the Dividend Stream for China would have fallen 12.5%. It is also important to note that the currency return for China was 0.2% over the period because the above returns measure only the dividends of Chinese H-shares, which trade in Hong Kong dollars (HKD) and typically pay dividends in Hong Kong dollars, and the HKD was essentially flat against the U.S. dollar over the period.   Figure 2: A Detailed Look at China For definitions of terms in the chart, please visit our glossary.   • Characteristics: It is interesting to note that the Hong Kong-incorporated securities displayed the highest median dividend yield, almost 1% higher than the China-incorporated securities. Chinese securities incorporated outside of China and Hong Kong displayed the highest median growth and quality characteristics, recording more than 2% higher growth expectations and return on equity compared to the median of all Chinese constituents.   • Performance: Although the Hong Kong-incorporated securities saw the highest median performance over the most recent five years, they have lagged the other two groups over the one- and three-year periods. Chinese securities incorporated outside of China and Hong Kong displayed lower median performance across all periods compared to the median performance of China-incorporated securities and of all China securities.