The S&P 500 is up 12.4% year-to-date based on price returns. With dividends reinvested the return jumps to 14.89%. The current dividend yield for the index is 2.23%. Despite rising corporate profits U.S. firms prefer to retain earnings than increase payouts.

Compared to this paltry yield, many foreign markets pay much higher yields. While in the past other developed markets have had higher dividend yields, currently many emerging markets also have dividend yields comparable to that of the U.S.  market.In some emerging countries dividend yields are actually higher than in the U.S. market. Naturally investors looking for better income on their investments are increasingly venturing into emerging stocks.

Some of the reasons for investing in emerging equities for income are below:

• Emerging market firms have changed their dividend policies in recent years. This year they were projected to pay 35% of their retained earnings according to a Reuters article earlier this year.
• In some countries such as South Africa and Taiwan the payout ratio is as high as 45-50%.
• The dividend culture in Brazil and Taiwan is almost similar to the dividend yield in developed markets.
• The gap in Yields and Payout ratios between developed and emerging markets is shrinking as shown in the charts below:

Source:  Emerging markets join the dividend race,  Reuters

• Governments in Russia and India are asking state-owned enterprises to payout a larger portion of their profits as dividends as the state stands to earn much-needed funds.
• Of the more than 800 stocks in the MSCI Emerging Markets Index, over 700 currently pay a dividend. 500 of these companies have increased dividends annually for the past five years.
• Emerging market dividends have grown at an annual compounded rate of 14% over the last 10 years, much faster than developed markets.
• The following chart shows the growing significance of dividends in emerging market total returns:

Source: Charlemagne Capital, UK

• The current dividend yields of select emerging markets are listed below:

Brazil – 3.8%
China – 3.7%
Chile – 3.1%
Malaysia – 3.2%
Russia – 4.2%
South Africa – 3.5%
Taiwan – 3.3%

• Among emerging countries, India and South Korea are poor dividend payers.

How to invest in emerging market dividend equities?

Most of the emerging dividend stocks do not trade on the US markets.Hence the easiest way to gain exposure to these equities is to invest via ETFs.

The iShares Emerging Markets Dividend ETF (DVYE) and SPDR^® S&P Emerging Markets Dividend ETF (EDIV) are two of the options. Investors’ attraction towards emerging dividend stocks is confirmed by the strong growth in asset sizes of these ETFs since the beginning of the year. The 30-Day SEC Yields are 5.37% and 6.79% respectively.Taiwan and South Africa are among the top countries in the funds.

For investors looking to invest in emerging dividend stocks directly ten options are listed below:

1.Company: PetroChina Co Ltd (PTR)
Current Dividend Yield: 3.58%
Sector:Oil & Gas Operations
Country: China

2.Company: CPFL Energy INC (CPL)
Current Dividend Yield: 6.96%
Sector: Electric Utilities
Country: Brazil

3.Company: Malayan Banking Bhd (MLYBY)
Current Dividend Yield: 7.21%
Sector: Banking
Country: Malaysia

4.Company: Sasol Ltd (SSL)
Current Dividend Yield: 4.91%
Sector:Chemical Manufacturing
Country: South Africa

5.Company:Banco Bradesco SA (BBD)
Current Dividend Yield: 3.44%
Sector: Banking
Country: Brazil

6.Company: Corpbanca (BCA)
Current Dividend Yield: 7.52%
Sector: Banking
Country: Chile

7.Company: Taiwan Semiconductor Manufacturing Co Ltd (TSM)
Current Dividend Yield: 2.93%
Sector:Semiconductors
Country: Taiwan

8.Company: Philippine Long Distance Telephone Co (PHI)
Current Dividend Yield: 4.71%
Sector:Telecom
Country: Philippines

9.Company:Companhia Energetica de Minas Gerais Cemig (CPL)
Current Dividend Yield: 14.09%
Sector: Electric Utilities
Country: Brazil

10.Company:Banco do Brasil SA (BDORY)
Current Dividend Yield: 7.72%
Sector: Banking
Country: Brazil

Note: Dividend Yields noted are as of Dec 14, 2012

Disclosure: Long BCA, BBD

Investing in emerging and frontier markets involves higher risks compared to investing in developed markets.However for investors willing to learn and explore opportunities in the emerging world the rewards can be substantial. The returns can be especially high over a period of many years when the compounding effect comes into play.

The Average Annualized Equity Returns for select Rapid Growth Markets(RGMs) is shown below:

Click to enlarge

Source: Rapid-growth markets: Moving toward the mainstream, Ernst & Young

Colombia was the top performer with a solid annualized return of 29% followed by Ukraine, Kazakhstan, Indonesia and Russia. Since global commodities such as oil soared during the period shown above it is not surprising to see Colombia and Russia are among the top of the list. The movement of Russian equity market is highly correlated to the price of crude oil.

Relative to the double growth of these markets, the S&P 500 grew by just 1.5% and European equities fell by an annualized rate of 4.6% respectively. In the past 12 years, the annualized return of MSCI Emerging Markets Index and the MSCI World Index were 6.2% and 1.6% respectively.

From the E&Y research report:

The difference in returns, compounded over this period, would have been considerable. For example, US$100 invested in Colombia’s stock market in 2000 would be worth approximately US$2,700 by 2012. For the Chinese, American and Japanese stock markets the corresponding returns would have been US$217, US$121 and US$56 respectively.

US equities fared very poorly when compared to the emerging equities although they were better than Japanese and European equities. European stocks had negative returns primarily due to the fall in prices during the debt crisis there in the past few years.

Ten emerging market ADRs from some of the countries in the above chart are listed below for further further research:

1.Company: PetroChina Co Ltd (PTR)
Current Dividend Yield: 3.61%
Sector:Oil & Gas Operations
Country: China

2.Company:Bancolombia SA (CIB)
Current Dividend Yield: 2.33%
Sector: Banking
Country: Colombia

3.Company:Coca Cola Femsa SAB de CV (KOF)
Current Dividend Yield: 1.33%
Sector:Beverages (Nonalcoholic)
Country: Mexico

4.Company:HDFC Bank Ltd (HDB)
Current Dividend Yield: 0.56%
Sector: Banking
Country: India

5.Company: Banco Santander-Chile (BSAC)
Current Dividend Yield: 4.16%
Sector: Banking
Country: Chile

6.Company: Ultrapar Participacoes SA (UGP)
Current Dividend Yield: 2.61%
Sector:Retail (Specialty)
Country: Brazil

7.Company:CPFL Energy INC (CPL)
Current Dividend Yield: 6.85%
Sector: Electric Utilities
Country: Brazil

8.Company: Malayan Banking Bhd (MLYBY)
Current Dividend Yield: 7.20%
Sector: Banking
Country: Malaysia

9.Company: Sasol Ltd (SSL)
Current Dividend Yield: 4.83%
Sector:Chemical Manufacturing
Country: South Africa

10.Company: Latam Airlines Group SA (LFL)
Current Dividend Yield: 2.02%
Sector: Airline
Country: Chile

Note: Dividend Yields noted are as of Dec 13, 2012

Disclosure: No Positions