Dividend stocks have taken the investing community by storm. With many investors desperately searching for income, low rates on traditional income-producing investments such as bonds and bank CDs have forced millions to look to higher-yielding dividend stocks to make up the difference.
Yet as well-known blue-chip dividend stocks have gotten increasingly popular, some forward-thinking investors have looked even further afield for income opportunities. One place where they've turned is perhaps the last place you'd expect to find conservative, income-oriented stocks -- yet they're producing returns that put broader measures of the market to shame.
When most people think of emerging markets, they envision fast-growing economies where up-and-coming companies are taking maximum advantage of unique growth opportunities. With some emerging nations still building basic infrastructure and services from the ground up, growth investors have a treasure trove of smart stock ideas to capitalize on those needs.
However, what even some emerging-market investors don't realize is that many companies have been operating in emerging nations for decades and have already built up mature, thriving businesses. Past their initial fast-growth stage, these companies are profitable, and in many cases, they've started to share their wealth with shareholders in the form of dividends.
Discovering great returns
Emerging-market dividend stocks are just as diverse as the emerging markets themselves. Just like telecom companies in the U.S. and elsewhere in the developed world have become dividend favorites, so too can you get impressive yields from companies like Russia's Mobile TeleSystems. AmBev (NYSE: ABV ) is a century-old company that distributes drinks across Latin America, and it has a yield that easily beats all of its U.S. counterparts.
Energy has also become an important part of emerging-market economies, both for utilities generating power and for natural resource companies developing energy products and exporting them into the world market. CPFL Energia (NYSE: CPL ) is a huge Brazilian electricity producer and distributor with a wide range of hydroelectric, wind, and other power plants. It yields more than 5%, beating out most utility yields in the U.S. despite having more growth potential. Meanwhile, Argentina's YPF (NYSE: YPF ) is an integrated oil and gas company performing exploration and production, transport, refining, and marketing of petroleum products and natural gas -- in addition to participating in power-generation ventures. YPF recently discovered shale gas reserves that could bring a new boom to the South American nation, and it has paid an impressive dividend for years, with current yields above 10%.
Investing from outside
At the same time, some well-established companies from beyond the emerging market saw the potential they had and jumped in early. For instance, Banco Santander has had considerable problems in its home market of Spain. But its Banco Santander Brasil (NYSE: BSBR ) subsidiary, with a 4%-plus yield, has helped the parent company immensely with its relative stability and exposure to the growing Brazilian financial markets. Vodafone (Nasdaq: VOD ) has similarly faced big trouble in the highly competitive European markets that are closest to its center of operations, but it's counting on strength in emerging markets to keep up its overall growth -- and continue backing up its dividend payout.
Whether companies are home-grown or come in from abroad, what they're finding in emerging markets are the profit opportunities they need to build sustainable profits -- the profits they can turn around and pay back to investors.
Scouting out emerging dividends
Emerging-market stocks can be more challenging to analyze, as you have to deal with obstacles like language barriers and foreign currencies. For a simple way to invest, the ETF WisdomTree Emerging Markets Equity Income owns all of the stocks mentioned above, along with hundreds of other dividend powerhouses. It has outperformed less dividend-oriented emerging-market ETFs over the past several years, holding up particularly well during down years for emerging stocks, like 2008 and 2011.
On the other hand, emerging markets are an area in which individual stock research can really add value. So if you want the best returns, use ETFs as a list of potential ideas to look at further.
Wherever you find them, dividend stocks have unique characteristics you won't find anywhere else. To find some promising picks closer to home, let me suggest reading the Motley Fool's special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." I invite you to grab a free copy to discover everything you need to know about these nine generous dividend payers.
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