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A Smarter Way to Invest in Emerging Markets: Dividends

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When I made my New Year's resolution, it was simple: I wouldn't be investing in Chinese small-caps. But in reality, if you don't have any exposure to emerging markets, you're missing out on enormous growth potential.

In order to make sure your cold, hard cash is going into real businesses providing real cash flows, I went looking for other opportunities in the BRIC countries of Brazil, Russia, India, and China. Specifically, I went sniffing about for mid- to large-cap companies that paid dividends.

Even if the dividends are small, they provide a sense of legitimacy to an otherwise unreliable sector, and because these economies are growing rapidly, dividend stocks still hold enormous potential for share-price appreciation.

Below, I offer up one company from each BRIC country that I believe could be a solid investment over the next three to five years. I'm backing up my words by entering all the picks into my All-Star profile as well. And at the end, I'll offer access to a report detailing an oft-overlooked way to get safe access to emerging markets.

Over the next four years, the world's light will shine brightly on this South American country and its economy. Brazil will be hosting the World Cup in 2014, and two years later, the 2016 Summer Olympics.

Viewers should notice a country undergoing massive changes. It's estimated that between 2003 and 2014, 55 million Brazilians will have joined the growing middle class. For a country with a population of just under 200 million, consider what that means: In the span of just over a decade, more than 25% of the populace will have moved from near-poverty levels to steady, sustainable, and substantial incomes.

With such a change, a lot is likely to change -- none more so than the demand for electricity. That's why I think CPFL Energia (NYSE: CPL  ) , a major Brazilian provider of electricity, is a solid stock to own.

Revenue and gross profit have both grown by over 70% from 2008 to 2010, and the company offers a solid 5.5% dividend. But the really attractive prospect is this: The company is currently using up a substantial amount of cash flow to build out its infrastructure. Once that infrastructure is built out, it may signal an end to revenue growth, but it will also signal a beginning to dividend growth, as free cash flow should balloon.

There aren't a whole lot of pure-plays in Russia, but I believe your best bet would be an investment in Mobile TeleSystems (NYSE: MBT  ) . This telecom provider serves not only Russia, but the former Soviet-bloc countries of Ukraine, Uzbekistan, Turkmenistan, Armenia, and Belarus.

While corruption is always something to worry about within this system, I think the numbers speak for themselves and provide a margin of legitimacy. Revenue grew at a healthy 14% pace between 2009 and 2010, while net income was up a more impressive 36% over the same time frame. More importantly, the company offers a 6.1% dividend yield, and last year, the company only needed to spend 57% of free cash flow to pay out dividends.

I'm going to admit it -- as far as dividend payments go, this one isn't the greatest. My pick for India is Dr. Reddy's Laboratories (NYSE: RDY  ) . The company only offers a puny 0.7% dividend yield, but don't let that number fool you into thinking that there isn't a world of potential here.

Dr. Reddy's specializes in manufacturing generic drugs as soon as the patents on brand-names expire. Though its located in India, its customer base has wide geographic diversity. While 19% of sales come from India, North America accounts for 31%, Europe for 21%, and Russia and other former Soviet bloc countries come in at 15%. The company also has a 51% stake in a joint venture -- Reddy Kunshan -- within China as well.

Most intriguing, though, is a 10-year partnership with GlaxoSmithKline. According to details of the partnership, Reddy's is only responsible for manufacturing and shipment of drugs, and Glaxo will be able to use their considerable market position to provide sales and distribution.

I've already stated publicly that one of my favorite investments in China -- which I already own -- is Baidu (Nasdaq: BIDU  ) . The company has shown there's nothing wrong with imitating Google, especially when Google isn't really competing in China.

For the purposes of this article, though, Baidu doesn't qualify -- it doesn't offer a dividend. Instead, I offer up to you Guangshen Railway (NYSE: GSH  ) . This regional train line operates both freight and passenger trains in Guangdong, China's most populous province -- clocking in with 100 million people. The rail not only offers passengers access from Hong Kong to mainland China, but also helps move tons of freight from one of China's most bustling manufacturing hubs.

It doesn't hurt that the company also offers investors a 3.2% dividend yield, and that last year, the company only needed to use a miniscule 26% of free-cash flow to pay out the dividend. There's clearly room for growth here.

A different approach
Hopefully, you'll consider all four of these companies. But if investing directly in emerging markets isn't for you, there's another strategy: Invest in American companies that are expanding abroad. In our special free report -- 3 American Companies Set To Dominate The World -- our analyst give you the names of three American brands that are getting an increasing amount of revenue from emerging markets. To find out which companies they picked, get your copy of the report today, absolutely free!

Fool contributor Brian Stoffel owns shares of Baidu and Google. You can follow him on Twitter at @TMFStoffel.

The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Guangshen Railway, Baidu, Dr. Reddy's Laboratories, Google, and GlaxoSmithKline. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 08, 2012, at 6:18 AM, Fool wrote:

    Great article Brian.

    Dr. Reddy's is also returning cash to shareholders through special dividends. As it is a part of my real-stock portfolio, I received a special dividend of $0.23/share in August and $0.64 (paid as a sale of rights on shares - which I believe to be related to warrants) in June. The total dividend of $0.87/share translates into a yield of roughly 2.6% at today's $33 share price.


  • Report this Comment On February 08, 2012, at 5:24 PM, RichardSinFW wrote:

    I concur!

    I'm starting to look for some ways to get into BRIC. Thanks for the ideas!

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