Emerging market equities have traditionally been considered for price appreciation as opposed to their income potential.As the name implies, emerging firms are highly attractive from the growth perspective since they have plenty of room to grow domestically and internationally in order catch-up with their developed world peers. However investors may be overlooking the fact that emerging equities can also be attractive candidates for dividend income. This is because dividend culture is slowly gaining traction in many emerging markets. South African firms have had a strong dividend-paying culture for a long time.Latin American companies are also embracing the concept of rewarding shareholders with dividends. Some Asian markets have historically been supporters of dividend payments and others are slowly starting to follow too.

One way to analyze emerging markets for dividend opportunities is using the dividend per share (DPS) metric.According to a Investment Insights report by J.P. Morgan,UK  DPS growth in emerging markets has been higher than in developed markets over the years as shown in the chart below:

Click to enlarge

Source: Total EM income: Maximising the EM income opportunity set, J.P. Morgan Asset Management, UK

From the report:

Exhibit 2 shows the long-term growth in dividends and earnings for the MSCI Emerging Markets Index vs. the MSCI World. The fact that emerging markets have consistently delivered higher growth in earnings per share (EPS) than the developed world is perhaps not a surprise. However, what many investors may have overlooked is that dividend per share (DPS) growth has been higher than developed world DPS growth and has also outpaced EM EPS growth. We believe these trends are sustainable as increased RoE allows the higher growth of emerging markets to be translated into profits.

As emerging companies continue to grow further their earnings should increase leading increased dividend payouts. Higher and rising dividends can help investors generate a superior total return over the long-term is higher due to the effect of compounding by reinvesting dividends.

The key to investing in emerging markets for income is to stay focused and ignore short-term volatility like the one we experienced late last year and earlier this year. Emerging markets are prone to higher volatility due to political issues, currency exchange rate gyrations, sudden outflow of foreign capital and so forth.Wise investors do not make knee-jerk reactions to these events but remind themselves of the original reason they decided to invest in emerging markets in the first place. Emerging markets are not the place for risk-averse investors.

Ten dividend stocks from ten emerging countries are listed below for consideration:

1.Company: Itau Unibanco Holding SA (ITUB)
Current Dividend Yield: 2.48%
Sector: Banking
Country: Brazil

2.Company: Standard Bank Group (SGBLY)
Current Dividend Yield: 4.57%
Sector: Banking
Country: South Africa

3.Company: Ecopetrol SA (EC)
Current Dividend Yield: 7.61%
Sector: Oil, Gas & Consumable Fuels
Country: Colombia

4.Company: Coca-Cola Femsa SAB de CV (KOF)
Current Dividend Yield: 2.15%
Sector: Beverages
Country: Mexico

5.Company: Empresa Nacional de Electricidad SA (EOC)
Current Dividend Yield: 1.83%
Sector:Independent Power Producers & Energy Traders
Country: Chile

6.Company: Chile Mobile (CHL)
Current Dividend Yield: 4.19%
Sector: Wireless Telecommunication Services
Country: China

7.Company:Taiwan Semiconductor Manufacturing Co Ltd (TSM)
Current Dividend Yield: 2.24%
Sector: Semiconductor
Country: Taiwan

8.Company: Malayan Banking Berhad (MLYBY)
Current Dividend Yield: 5.94%
Sector: Banking
Country: Malaysia

9.Company: Philippine Long Distance Telephone Co (PHI)
Current Dividend Yield: 4.83%
Sector: Mobile Telecom
Country: Philippines

10.Company: Creditcorp Ltd (BAP)
Current Dividend Yield: 1.94%
Sector: Banking
Country: Peru

Note: Dividend yields noted above are as of Feb 21, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long ITUB

Most equity markets worldwide are down so far this year. The big sell-off in January was followed by another fall in the US markets yesterday. The S&P 500 is already off 5.76% year-to-date.Other major developed markets are also in the negative territory this year. For example, the broad market indices tracked by S&P 500 for Germany, France and Canada were off by over 4% in January alone.

Relative to developed markets, emerging markets have performed even worse. Plunging currencies in Argentina, Russia, Hungary, Turkey, Indonesia, etc. have revived fears of an emerging market meltdown. As a result, emerging stocks are having another bad year after last year’s poor performance.

Volatility is back with a vengence as triple digit losses for the Dow and S&P are occurring more frequently.In light of the high losses year-to-date in both emerging and developed markets and the tremendous volatility almost on a daily basis some investors may be thinking of dumping their equity holdings and moving to cash or other safe-haven assets now. But it is not wise to panic and liquidate stocks at current levels. While it is hard not to follow the herd and sell, panic selling has a high cost. When markets are so volatile investors should stay calm and stay disciplined and focus on their long-term goals. Emerging markets such as Turkey, Hungary, Indonesia, South Africa, etc. are not significant enough to topple the global economic recovery. Though the media may portray Turkey and Argentina as the villains for starting the current crisis, these countries are unlikely to trigger the next global financial crisis anytime soon.

With that in mind lets discuss some of the effects of panic selling. According to an article by Tom Elliott of J.P. Morgan Asset Management, the cost of panicking can be high. The chart below shows the annual returns of the MSCI Europe Index in the grey bars and the little diamonds for each bar shows the calendar year high and low for that year as percentage returns from Jan 1st.

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Source: The cost of panic, Tom Elliott, J.P. Morgan Asset Management, UK

The difference between max gain and max loss for a year is significant. Hence it is better for investors to ride out the volatility as opposed to trying to time the market.

Another important factor to note is the high risk of realizing losses at the end the year in years when the market is down. This is because the chances of the market rising sharply in the year following a down year are quite high as shown in the chart above. So an investor that sells out all his equities in a down year and shifts to cash or gold will lose out the potential big gains the following year.

Similarly the chart below shows the largest declines in the S&P 500 since the March 2009 lows during the global financial crisis:

Source: Flight to Safety Hasn’t Left Gate, The Wall Street Journal, Jan 27, 2014

Following the same logic related to the first chart above, here too the market recovered after every decline.Investors who sold at the lows during the periods shown would have missed the run up that followed.

In summary, the main takeaway from this article is not to panic-sell during volatile market conditions. Instead one should ride out the storm and can even try to pick up high quality stocks at cheaper prices.

Related ETFs:

• iShares MSCI Emerging Markets Index Fund (EEM) 
• Vanguard Emerging Markets ETF (VWO)
• SPDR S&P 500 ETF (SPY)
• SPDR STOXX Europe 50 ETF (FEU)

Disclosure: No Positions