Emerging markets hike yields

LONDON • Once mainly growth-based investments, emerging markets are seeing a dividend payout culture take root among companies, especially in countries where big local pension funds are pushing for change.

Emerging companies paid a record US$119 billion in dividends last year, double 2009 levels and more than three times what they paid in 2005. Payout ratios — the percentage of earnings given in dividends — exceeded developed countries by four per cent, according to Aye Soe, research director at S&P Dow Jones Indices.

That is less than a third of what U.S. firms paid shareholders last year. But adjusted for currency and special payouts, dividends are growing faster in emerging markets than other regions at around 30 per cent a year, according to the quarterly Henderson Global Dividend Index.

With emerging equity performance lagging developed peers for the fifth year running, more companies are realizing the role dividend payouts play in boosting shares and attracting investors, said Julian Mayo of Charlemagne Capital, whose US$480-million dividend fund has returned 40 per cent in sterling terms since 2012, according to Lipper.

That compares with a fourper-cent fall in this period for MSCI’s emerging equity benchmark

“The EM dividend story is not sufficiently recognized, in that investors look at EM for growth and see disappointing earnings, but the reality is many good-quality companies are compounding earnings and paying out to shareholders,” Mayo said.

Similarly, JPMorgan Asset Management’s EM income trust has returned more than 20 per cent in the past three years, according to Lipper.

“Exposure to emerging market equities has eroded organically in recent years, but we have seen a continual dripfeed into our income funds,” said Emily Whiting, client portfolio manager at JPM AM. “Investors use these funds as they are being paid to hold exposure to EM, receiving a fiveper-cent yield.”

There is another powerful driver of the dividend trend: local pension and insurance industries in developing countries and their need for income.

Such pension funds, faced with the cooling of once redhot emerging-market growth and the collapse in global bond yields, are turning to equity income, said Peter Lee, executive managing director of Mirae Asset Global Investments.

“Going forward, rapid growth rates are behind us. Second, interest rates are generally low, which has huge meaning for institutional investors such as pension funds,” Lee said.

“Fo r pension funds, everything is about yield. If you don’t get yield, you are doomed and that’s making some pension funds activists. Their liabilities are huge, but yields are low and one way to bridge the gap is to push companies to pay more dividends.”

That change is exemplified by South Korea, where a new law taxing excess corporate cash compels tight-fisted companies to pay more dividends. That forced firms such as Hyundai and Samsung to lift 2014 dividends by 40 to 50 per cent.