“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.”

– Vladimir Lenin

The S&P 500 closed at 1,977 yesterday. The index has more than doubled from the lows reached in March 2009 at the peak of the global financial crisis. For the first time it crossed the 2,000 mark in August and earlier this month reached a new record of 2,019. According to an article in UK-based MoneyWeek magazine S&P 500 has hit over 30 new record highs this year.

These records may seem fantastic at face value. However when inflation is taken into consideration and the S&P 500’s returns are reviewed in terms of real returns, the soaring index values does not mean much. In fact, quoting Gene Epstein of Barron’s the article notes that the S&P 500 is actually 5% below the previous inflation-adjusted, all-time high reached in March 2000.

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Source: Chart of the week: Rain falls on the bulls’ parade, MoneyWeek, 9/26/14

From the article:

The S&P 500 previously hit an inflation-adjusted, all-time high in March 2000. Since then, US inflation, as measured by the Consumer Price Index (CPI), has climbed by almost 40%. Factoring that in transforms the previous record to 2,124, notes Epstein, and the market is still more than 5% below this milestone.

Meanwhile, the technology-heavy Nasdaq Composite has done far worse in real terms since 2000; investors in the Dow Jones index, on the other hand, have managed to make a small profit.

So for example an investor holding equities in the form an index fund mirroring the S&P 500 from March 2000 has had a negative return when inflation is included. However in general most investors do not pay much attention to analyze their returns accounting for adverse effects of inflation. The above chart brutally makes it clear that despite being the market for 15 years the investor did not even make a positive real return.

According to one estimate, the value of the US dollar has fallen by 38.1% since 2000. Hence an item that cost $100 in 2000 would cost $138.13 today. To put it another way, the government has destroyed the purchasing power of the dollar by an astonishing 38% during this short-term time period.  Over decades the dollar has lost most its value. The following chart shows the decline in purchasing power of the dollar from 1900 thru 2010:

Source: The Decrease in Purchasing Power of the U.S. Dollar Since 1900,  April 21, 2011, Observations Blog

Related ETFs:

• SPDR S&P 500 ETF (SPY)
• SPDR Gold Trust ETF (GLD)
• PowerShares QQQ Trust (QQQQ)
• SPDR Dow Jones Industrial Average ETF (DIA)

Disclosure: No Positions

In an earlier article I discussed about the decline in the dividend payout ratios of U.S. companies. In this post let us take a look at how dividend payout ratios in the emerging markets compare to that of U.S. dividend payout ratios.

Many investors in the developed world have the misconception that emerging market equities are not great dividend payers. However that is not entirely true.There are plenty of emerging stocks that have decent dividend yields that are comparable to their peers in the developed world. Some of these emerging companies even have higher dividend growth rates. In general unlike the developed markets, emerging markets have a much bigger universe of companies to choose from and companies are growing and competing fiercely in order to attract investors’ capital. One way some of these firms compete is by sharing a higher portion of their earnings with shareholders by establishing strong dividend payout policies and following them. In fact, some of the firms in Asia that did not pay a dividend before are starting to pay dividends as they embrace the dividend culture that is common in developed markets. As more and more companies from developing countries become global multinationals and their profits grow, they are highly likely to reward shareholders by increasing their dividend payout ratios.

Investors may be surprised to learn that dividend payout ratios of emerging markets are comparable to that of the U.S. dividend payout ratios as represented by the S&P 500 and MSCI Emerging Markets Index.

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Source:  Dividend Growth in Emerging Markets, Emerging Global Advisors

Hence investors looking to add dividend stocks can also consider emerging market dividend stocks. This does not mean investors should rush into these stocks. Since emerging markets will always be more volatile than developed markets and they are riskier it is wise to allocate only a small portion of one’s income part of a portfolio to emerging stocks.

Developing markets such as Chile, Taiwan, South Africa , etc. are better for dividends than others such as South Korea or Russia. In addition to country selections, it is also important to be highly selective when hunting for income stocks in developing markets.

Ten dividend stocks from emerging markets are listed below to consider for potential investment opportunities:

1.Company: Standard Bank Group (SGBLY)
Current Dividend Yield: 4.39%
Sector: Banking
Country: South Africa

2.Company:Taiwan Semiconductor Manufacturing Co Ltd (TSM)
Current Dividend Yield: 2.48%
Sector: Semiconductors & Semiconductor Equipment
Country: Taiwan

3.Company:China Mobile Limited (CHL)
Current Dividend Yield: 3.37%
Sector: Telecom
Country: China

4..Company:Banco Santander- Chile (BSAC)
Current Dividend Yield: 4.44%
Sector: Banking
Country: Chile

5.Company: China Petroleum & Chemical Corp. (SNP)
Current Dividend Yield: 4.33%
Sector: Oil & Gas
Country: China

6.Company: Ultrapar Participacoes SA (UGP)
Current Dividend Yield: 2.78%
Sector: Oil, Gas & Consumable Fuels
Country: Brazil

7.PT Telekomunikasi Indonesia Tbk (TLK)
Current Dividend Yield: 2.90%
Sector: Telecom
Country: Indonesia

8.Company: Empresa Nacional de Electricidad SA (EOC)
Current Dividend Yield: 2.66%
Sector: Electric Utilities
Country: Chile

9.Company: CPFL Energia SA (CPL)
Current Dividend Yield: 5.59%
Sector: Electric Utilities
Country: Brazil

10.Company:Philippine Long Distance Telephone Co (PHI)
Current Dividend Yield: 3.88%
Sector: Telecom
Country: Philippines

Note: Dividend yields noted above are as of Sept 26, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long UGP