September 28, 2020 BARRON’S 35
E
merging markets aren’t among
the first places investors typically
think of when scanning for divi-
dend stocks, but they can offer
reliable and growing payers.
It’s important to tread carefully, how-
ever, given risks such as currency fluctua-
tions and less rigorous corporate gover-
nance in certain cases.
“You can find world-class businesses in
emerging markets,” says Giorgio Caputo,
portfolio manager of the JOHCM Global
Income Builder fund (ticker: JOBIX).
“The countries that have gotten this right
have moved up the ladder from pure man-
ufacturing into IP,” or intellectual prop-
erty—most notably technology companies.
He points to companies in South Korea,
Taiwan, and “increasingly mainland
China” for making the leap.
The fund’s two emerging market hold-
ings are American depositary receipts of
Taiwan Semiconductor Manufacturing
(TSM), which yield about 2%, and pre-
ferred shares of Samsung Electronics
(005935.South Korea), yielding about 2.8%.
Attractive yields can be hard to come by
in emerging markets, however. About 35%
of the stocks in the MSCI Emerging Mar-
kets Index yield below 0.5%, according to
Tim Morris, an investment specialist at J.P.
Morgan Asset Management. The index is
down about 1% year to date, dividends in-
cluded. Morris says the low yields in those
markets reflect, in part, the pressure finan-
cial firms have come under during the
Covid-19 pandemic, as many have been
forced to cut their dividends.
For dividends, some emerging market
countries offer better opportunities than
others. As of Sept. 22, the top country
weighting for the iShares Emerging
Markets Dividend exchange-traded fund
(DVYE) was China at 21.8%, followed by
Russia at 15.1%, and Taiwan at 11.1%.
Morris, whose duties include working
with the portfolio managers of the JPMor-
gan Emerging Markets Equity fund
(JFAMX), says dividend yield isn’t the pri-
mary hurdle for a stock to make it into the
fund, but one of several factors—another
being a company’s earnings growth poten-
tial over the next five years.
One of the fund’s largest holdings is
Taiwan Semiconductor. The chip maker,
Morris says, has “very steady and consis-
tent revenue streams that have been a
strong tailwind.”
Another of the fund’s holdings is
Hong Kong Exchanges & Clearing
(388.Hong Kong), which yields 1.6%.
“We’ve seen the dividend rising, particu-
larly as the earning story becomes quite
favorable for this exchange operator,”
says Morris. The fund also holds Wal-
Mart de Mexico (WALMEX.Mexico),
which yields about 1.5%.
While there is yield available in emerg-
ing market stocks, investors need to use
some caution. There is currency risk,
which can depress returns for U.S. inves-
tors at times, and in certain cases, corpo-
rate governance can be a concern, says
Caputo. “It’s not the first stop on the bus
for an income investor,” he adds, but “you
can find some great income-generating
businesses in those markets.”
Something else that U.S. investors need
to consider when buying an overseas stock
is a dividend withholding tax imposed by
a foreign country.
“The withholding rates in emerging
market countries are not uniform,” says
Robert Willens, who runs an accounting
and tax consultancy. Some countries, he
says, have modest withholding rates, such
as Thailand (8%) and the Dominican Re-
public (10%), while others are higher, in-
cluding Taiwan (20%). However, U.S. in-
vestors in many cases can take a credit on
their U.S. taxes to offset some or all of that
foreign withholding tax.
Taxes aside, for income investors hun-
gry for yield, emerging markets may offer
some rewards—if you can tolerate the
risk.B
By Lawrence C. Strauss
Don’tBankonthe
Deathof CashJustYet
INCOME INVESTING MAILBAG
How to Find Dividends in
Emerging Market Stocks
To the Editor:
Abandoning cash carries two obvious costs
(“Cash Is History. How to Profit From the
Digital-Payment Future,” Cover Story, Sept.
18). First, the payer loses by paying to pay.
The charge may be indirect and hidden, but
it drains the payer’s purse like a pickpocket.
Second, the payer loses by revealing buying
behavior to a host of self-serving interests,
the most dangerous being government. Pri-
vacy becomes a right long gone.
Gene Moss
On Barrons.com
To the Editor:
The bigger question for investors is which
companies truly have impenetrable moats.
Will new technologies such as cryptocur-
rencies render many of the current payment
systems obsolete in the not-too-distant fu-
ture? Looking at the valuations, there
doesn’t appear to be much margin for error.
Richard Saler
On Barrons.com
Backing Bill Ackman
To the Editor:
Ackman deserves credit for his thoughtful
analysis of the panic that would ensue
with the pandemic and how to structure
his credit trade (“Inside the Greatest Trade
of All Time—and What Bill Ackman Is
Investing in Now,” Guide to Wealth, Sept.
18). It’s very similar to those who saw the
housing bubble and bought credit-default
swaps on mortgage bonds. Have to give
him credit for moving that kind of money,
based on the strength of his conviction.
Earl Kusnierz
On Barrons.com
Tainted Policy Punch
To the Editor:
I wish people would stop describing today’s
economy and markets as a party, fueled by
the Fed’s punch bowl (“The Fed’s Major
Policy Shift,” The Economy, Sept. 18).
Inflationary monetary policy erodes the
future value of today’s work, when stored in
U.S. dollars, requiring people to work lon-
ger to afford retirement and achieve their
desired standard of living. While it might be
argued that inflationary monetary policy
promotes “maximum employment,” it is
only doing so by first robbing people of
their savings—which requires existing
workers to work longer, crowding out jobs
for younger workers and stifling consump-
tion—all while artificially low interest rates
lead to more and more inefficient invest-
ment, lower growth rates, and a higher
probability of collapse under the weight of a
massive debt bubble. Some party.
Adam Manus
On Barrons.com
A Smarter Way to Invest
To the Editor:
There’s no way to know what tomorrow
may bring (“How to Invest for a Post-Covid
World,” Sept. 18), so best to keep a diversi-
fied portfolio and keep the faith that the
markets will continue their long-term trend
higher, as they have since their inception.
It might seem counterintuitive, but
maybe you really do need only three index
funds: total U.S. market, international, and
bonds. After decades of investing, I think
I’ve finally become a convert.
Peter Brooks
On Barrons.com
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