Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why EM Dividends Are the New Safe Haven in 2026
Transcript
- Lucas: So emerging market stocks have gotten absolutely hammered this first week of June. The iShares MSCI Emerging Markets ETF, ticker e e m, is down about seven percent in five days. South Korea's been the worst — the EWY ETF, which tracks Korean stocks, is down over thirteen percent in that same window. Luna: And that's on top of a pretty rough May for most EM indices. But there's actually a corner of the market that's holding up better than you'd expect, and it's not what most people think of when they hear 'emerging markets'. Lucas: You're talking about dividends. Because while headline index numbers look brutal, a lot of the pain is concentrated in growth and tech stocks — the high-multiple names that get crushed when the dollar strengthens and global risk appetite dries up. But dividend payers? They're telling a different story. Luna: Yeah, I was looking at that. The MSCI Emerging Markets High Dividend Yield Index has actually outperformed the broad EM index by about four percentage points this week. Which makes sense — when the market's in selloff mode, investors want cash flow, not promises. Lucas: Exactly. And this isn't just a short-term defensive play. The structural case for EM dividends in 2026 is pretty compelling. Let's start with the obvious one: Saudi Aramco. The company pays out a dividend yield of roughly six percent, and it's arguably the most profitable company in the world. That yield is supported by oil revenues that, even at current prices, are generating enormous free cash flow. Luna: And the Saudi government needs that dividend — they own the vast majority of shares. So there's a strong incentive to keep payouts high. That's about as reliable as EM dividends get. Lucas: Right. But it's not just Saudi. Take Brazil. Petrobras, the state-controlled oil giant, is yielding close to eight percent. And Brazilian utilities — companies like Eletrobras — have been increasing dividends for years, partly because the regulatory framework in Brazil now penalizes utilities that don't pay out a minimum percentage of profits. Luna: That's an interesting point. It's not just about companies choosing to pay dividends — in some EM countries, the rules basically force them to. South Africa has a similar dynamic with its mining companies. Anglo American, for instance, has a policy of paying out at least forty percent of earnings as dividends. Lucas: And that dividend yield gets even more attractive when you factor in the weak currencies. Because for a dollar-based investor, if the Brazilian real or the South African rand depreciates against the dollar, the dividend you receive in local currency is worth less — but the yield on the stock price, which is also in local currency, actually looks higher in dollar terms. So you're getting a double whammy of valuation adjustment and potentially higher income. Luna: Though of course, currency risk cuts both ways. If you're a local investor in Brazil, a high dividend yield in reais is great, but if the real crashes, your purchasing power takes a hit. But for a foreign investor who's already hedged or just taking the currency risk as part of the trade, the math can work. Lucas: Let's talk about the broader market context. The US dollar has been strengthening this year — the trade-weighted index is at 120, which is near multi-year highs. That typically sucks capital out of emerging markets because investors chase dollar-denominated yields. But EM dividend stocks offer an alternative: you get dollar exposure through the stock itself, but the underlying business is generating cash in a local currency that's probably undervalued. Luna: And that's the argument some value-oriented EM fund managers are making right now. They say the selloff is creating opportunities in high-quality dividend payers that are trading at single-digit price to earnings ratios, with yields above five percent. By contrast, the ten-year US Treasury is yielding around four and a quarter percent. So you're getting a risk premium for EM equities that's actually quite attractive. Lucas: That's a great framing. I want to look at one specific example: the EWY ETF we mentioned — South Korea. It's down over thirteen percent in five days. South Korean stocks have been pummeled because of exposure to semiconductor cycles and trade tensions. But there are Korean companies that pay decent dividends — like some of the telecoms and utilities — that have held up much better. The spread between the worst-hit stocks and the dividend payers in that index is probably the widest we've seen in years. Luna: And that's exactly when a dividend-focused strategy can shine, because you're not just waiting for capital appreciation — you're getting paid to wait. If the market takes a year to recover, you've collected that yield. If it recovers faster, you get both. Lucas: Which brings me to a bigger point: this might be a structural shift in how investors approach EM. For the last decade, the narrative was all about growth — China tech, Indian unicorns, Korean semiconductors. But with interest rates staying higher for longer in the US, and the dollar strong, maybe the playbook is shifting toward value and income. And EM actually has some of the highest dividend yields among global equity markets. Luna: Yeah, I saw a note from BlackRock this week — they're calling it one of the 'mega forces' that's changing investing. They specifically mentioned the search for yield in a higher-rate world, and how EM dividends are one of the few places where you can still get a meaningful income premium. Lucas: And of course, not all EM dividends are created equal. You have to be careful about payout ratios and sustainability. A company that's paying seven percent but borrowing to do it is a red flag. But when you look at the oil majors, the mining companies, the regulated utilities — these are businesses with real pricing power and cash flows that are less dependent on economic cycles than, say, a consumer tech stock. Luna: Speaking of which — I know this is a bit of a shift, but since we're talking about finding value and staying informed, I just want to mention something. If you find these conversations useful, and you'd like to support the show, we have a listener support page. It's buy me a coffee dot com slash fexingo. No pressure at all — just a way for folks who get value out of the podcast to help keep it ad-free and independent. Lucas: Absolutely. It's a small gesture that goes a long way for us. And it helps us keep digging into topics like this one. So thank you to anyone who's already supported us — it really makes a difference. Luna: Alright, back to dividends. So we've talked about the appeal, but what about the risks? One big one is that dividends can be cut. And in a downturn, that's exactly when you need them most. How do you assess which EM dividends are safe? Lucas: Great question. I think the key metrics are payout ratio — ideally below 75 percent — and free cash flow coverage. If a company's dividend is covered by free cash flow by a multiple of two or more, that's a good sign. Also look at the debt level. A company with high debt and a high dividend yield is a candidate for a cut if earnings weaken. Luna: And you also want to look at the political and regulatory environment. In some EM countries, governments have forced utilities to cut dividends or have imposed windfall taxes on oil companies. So it's not just a financial analysis — it's a political risk analysis too. Lucas: Exactly. Take India — a fast-growing economy, but many of its companies reinvest earnings rather than pay dividends. So the yield on the INDA ETF, which tracks Indian stocks, is only about one and a half percent. That's not an income play. But in Brazil or South Africa, you can get five to eight percent, because the corporate culture is more shareholder-distributive. Luna: And that's partly due to tax structures. In Brazil, dividends are tax-free for individuals, so companies are more willing to pay them. In India, dividends are taxed at the shareholder level, so it's less attractive. That's a huge factor that many investors overlook. Lucas: Right. So if you're building an EM income portfolio, you want to overweight countries with favorable tax treatment and strong dividend cultures. Saudi Arabia, Brazil, South Africa — those come to mind. And then within those markets, you want companies with visible cash flows and low debt. Luna: One more thing — the ETF angle. There are a few EM dividend ETFs out there, like the WisdomTree EM High Dividend fund, ticker d e m, and the iShares EM Dividend ETF, ticker D-V-Y-E. They've held up much better this week than the broad EM ETFs. d e m is only down about three percent, compared to EEM's seven. Lucas: That's a significant outperformance. And it shows that investors are indeed rotating toward yield. Now, the question for the rest of 2026: is this a tactical trade or a strategic shift? I lean toward the latter, because the macro environment — higher US rates, strong dollar, slower global growth — favors income over growth. And EM dividends offer a rare combination of high yield and potential for currency appreciation if the dollar eventually weakens. Luna: But that dollar weakness might not happen anytime soon. The trade-weighted index is at 120 and still climbing. So in the near term, the headwind is real. But if you're a long-term investor, buying when yields are elevated and valuations are low has historically worked out well. Lucas: Absolutely. And that's the case we're making today — not that EM stocks are about to rally, but that there's a compelling income story within the asset class that's being overlooked amid the panic. If you focus on the dividend payers, you might find that the selloff is actually creating an entry point. Luna: Worth watching. Thanks, Lucas. And thanks to everyone listening. We'll be back tomorrow with another angle on the emerging markets story. Lucas: Take care, everyone.