Historically seen as vibrant economies fuelled by urbanisation, technological innovation and strong consumer demand, emerging markets have primarily attracted investors seeking capital gains. However, ongoing improvements in capital discipline and corporate governance are transforming emerging markets into fertile ground for dividend growth.
Investors are often surprised by the depth and breadth of dividend opportunities available in emerging markets.
Over a decade ago, dividend investors focused on markets such as Brazil, known for its mandatory dividend policies, or South Africa, where many management teams prioritised shareholder payouts. While these markets remain very relevant, new opportunities are emerging in countries such as China, Mexico and Indonesia, broadening the horizons for dividend seekers.
Take Walmart de Mexico, a leading Mexican retailer within the JPMorgan Global Emerging Markets Income Trust. With a return of 25.7% in 2023 and a solid track record of regular dividends, Walmex shows how consumer-driven companies in emerging markets can offer both income and growth.
Similarly, Midea, a Chinese appliance giant, has increased its dividend payout ratio to over 40%, reaching 62% as of June 2024. Since China opened its A-shares to foreign investors in 2014, companies like Midea have become more accessible to global income-seeking investors.
Dividends go hand-in-hand with good corporate governance
In emerging markets, dividends can be a helpful tool for choosing stocks, as there’s a strong link between regular dividend payments and good corporate governance. Put simply, companies that consistently pay cash dividends show a commitment to their shareholders, which helps us identify solid investment opportunities.
The Indian IT services sector is a good example of how dividends and corporate governance have evolved in emerging markets. For a long time, these companies were operationally strong, but their dividends were too low for income-seeking investors, despite strong cash generation.
However, after discussions with shareholders about how cash reserves were being used, companies in the sector started to return more cash to shareholders including the likes of Tata Consultancy Services and Infosys Consulting.
Today around 90% of free cash flow generated in the sector is returned to shareholders via dividends and share buybacks, making this industry a natural home for investors looking for income and growth.
We believe that the same dividend and governance evolution could be replicated in other sectors and in other markets. In the Korean banking sector, for example, where shareholder returns and dividend payouts have always been low down on the list of priorities, we are now seeing signs of improvement.
The bigger Korean banks now have a dividend payout ratio target to move towards 30%, while some lenders have also started share buyback programmes, which were rare in Korea.
Focusing on resilient dividends over ‘yield traps’
When seeking dividends in emerging market, it’s not enough to just invest in deep value stocks, which tend to have the highest yields. This strategy can lead investors into ‘yield traps’, which are cheap but possibly for a good reason. Quality is therefore also crucial.
Rather than simply targeting the highest yielding stocks in the universe, a sound income strategy should focus on dividend resilience and growth. By focusing on quality dividend payers, investors can tap into emerging markets' long-term growth potential while benefiting from a steady income.
As global economic uncertainties lingering, dividend investing in emerging markets has emerged as a compelling strategy, enabling investors to generate income while tapping into the growth potential of diverse economies. Supported by a strong dividend culture, steady payout ratios and improving corporate governance, emerging market equities can become integral to a long-term investment strategy.
In today’s complex financial landscape, an equity income strategy focused on dividends not only offers a buffer against volatility but also opens doors to sustainable returns, striking a balance between stability and growth.
Omar Negyal is co-manager of JPMorgan Global Emerging Markets Income Trust. The views expressed above should not be taken as investment advice.