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ETF Specialist

The Case for Emerging-Markets Dividend Funds

Finding real value in growth.

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The emerging-markets story is all about growth, the red-hot kind. Paradoxically, the best way to benefit from economic growth may be to hold boring, dividend-paying stocks. Compared with the rich world, emerging markets have weaker rule of law, feeble protection for minority shareholders, and poorer management--all factors that have fed into relatively poor stock-market returns for fast-growing economies in the past. Holding dividend-payers is one of the few ways individual investors can mitigate these issues. Before we delve into the case for dividends in emerging markets, it's worth pointing out why dividends are good in general.

King Dividend
The small, regular payments companies make are powerful. London Business School professors Elroy Dimson, Paul Marsh, and Mike Staunton found that of the U.S. stock market's 6.22% annualized real return earned from 1900 to 2010, 4.2 percentage points came from dividends, 1.4 percentage points from dividend growth, and the rest from investors' willingness to pay more for a dollar of dividends. Of all 19 major markets Dimson, Marsh, and Staunton looked at for the period from 1900 to 2010, Sweden's yawn-worthy 1.77% dividend growth rate was the highest.

Samuel Lee does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.