The Trade that Fits All


By Monish Chhabra ǀ May 11, 2021

What do the following have in common?

o A telecom company in Brazil priced at 8% annual dividend yield.

o A real estate company in Taiwan selling at 8% dividend yield.

o An energy company in Indonesia that paid out 14% dividend last year.

o A coal company in India that is expected to pay 18% dividend next year.

o A steel company in Russia that paid out 12% annual dividends over the past 5 years.

o A mining company in South Africa that offers 15% annual dividend.

Other than the high dividend yield, all these stocks have seen their prices go nowhere over the last 12 to 15 years.

This is not peculiar to just a handful of such cases. These six stocks are emblematic of a big bunch of high-dividend paying companies in the emerging markets.

Many of these companies saw their stock prices peak in 2008, and in some cases as far back as 2005, and are still below that price. Over the years, they have basically gone just back and forth in price, while the dividends grew. This has led to the high dividend yields we observe today.

Most of such stocks are from sectors like financials, energy, materials, utilities and real estate. These sectors have languished over the last decade, while the global stock markets have been rocket fueled by technology and consumer sectors.

The following chart shows the returns of a set of about 100 high-dividend paying emerging market stocks (in blue), as compared to, a set of about 100 technology stocks around the world (in orange).

The starting price for both is normalized at 10. The plot depicts total return, inclusive of dividends and stock splits.

Over the last decade, the high-dividend paying stocks in the emerging markets have done nothing for the investors, despite taking into account the dividends they paid out. While during the same time, tech stocks have grown their investors’ wealth by 5-times.

The companies and sectors represented by the blue line have lost 80% of their value, against those represented by the orange line. Despite starting from the same point, the blue stocks are worth just one-fifth of the value of the orange stocks today.

What justifies such a wide gap

The above price performance indicates a growth rate of 20% per annum for tech stocks, and 0% for high-dividend emerging market stocks, year after year.

One could argue that the many tech companies have indeed grown at 20% or higher annual rates over the last decade, and may continue to do so for some time in the future.

Yet, it is hard to argue that many dividend-rich financials, utilities, materials, energy and real estate stocks in the emerging markets have not grown at all over the last decade, and would not grow in the future as well.

There is a good chance that the growth differential between these two sets of stocks may not continue to be so wide.

We are already seeing some signs of that narrowing.

What indicates a narrowing of gap

The following chart shows in purple, the ratio of the set of high-dividend emerging market stocks, over the set of tech stocks. Shown in green is the band, within which this ratio seems to oscillate with high statistical probability.

In October 2020, this ratio touched a major low at the bottom of the band, and has since turned around in a way that is now statistically convincing.

The last time this ratio saw a major bottom of the band was around the end of 2015. Thereafter, it bounced and stayed above that level for two years, till around the end of 2017.

Even if the current turnaround doesn’t sustain any longer than before, and only tracks similar to the previous bounce, we may see it stay up until the late-2022.

And if over this time, the purple ratio graph rises to touch the top of the green band, while the tech set stays flat in price, this would mean a rise of +50% for the high-dividend EM set.

The current outperformance of high-dividend emerging market stocks may last well into the second half of 2022, and could see this set rise by +50% as compared to the set of technology.

This would also mean that these stocks could finally break out of the lid they are under, over the past decade. We are already seeing some signs of that in motion.

We plot again in blue below, the returns graph of the set of high-dividend paying stocks in the emerging markets. We also include the green band within which the price seems to oscillate with high statistical probability.

The previous bounces all failed soon after touching or breaching the top of the green band. However, this latest one seems more resolute.

We may see these high-dividend emerging market stocks finally break out of the rut, and do something meaningful for their investors, considering that

a) The current rally in the high-dividend emerging market stocks is already breaching the top of its decade-old band, and

b) There may still be at least a year or more left in the out-performance of these stocks, over their otherwise high-flying tech brethren.

Who is invited to the party

Both the ‘growth’ and ‘value’ investors.

For someone who looks for value, high-dividend paying companies in emerging markets, present a compelling case. This group is selling at a dividend yield of more than 6%, price-to-earnings of 8, and price-to-book of 1.

The momentum is also on their side. The current move in these stocks is statistically convincing; both in their own price breaking out of a long-held band, and also, in their out-performance against the high-flying growth sectors.

For someone who invests in growth, these high-dividend emerging market stocks are a good hedge. If the current rally in these stocks and their out-performance continues over the next year or more, it would buffer the growth-heavy portfolios.

And if the high-growth set resumes its flight, the downside of the high-dividend emerging market set would be tolerable. The former could make in a year, what the latter may lose in its worst-case scenario.

Emerging market dividend isn’t too cool for anyone. Precisely why it can become a consensus fit for most.

This write-up is for informational purpose only. It may contain inputs from other sources, but represents only the author’s views and opinions. It is not an offer or solicitation for any service or product. It should not be relied upon, used or construed as recommendation or advice. This report has been prepared in good faith. No representation is made as to the accuracy of the information it contains, nor any commitment to update it.