Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Emerging Market Dividends Are Outperforming Growth
Transcript
- Lucas: So, we're doing episode 100 today, and I wanted to bring something that's been quietly reshaping portfolios in the background. Everyone's been watching China tech stocks rip higher — Alibaba up nearly 12 percent in the last five days, JD up 5 percent, the KWEB ETF up over 5 percent. But here's the thing I find more interesting: emerging market dividend stocks have actually outperformed the broad EM index year to date. Luna: Wait — dividend stocks in emerging markets? That feels like a portfolio choice people make when they're scared, not when they're chasing returns. Lucas: Exactly. And that's the narrative, right? EM is supposed to be about growth. But if you look at the MSCI EM High Dividend Yield index versus the standard MSCI EM index, the dividend version has beaten the broad index by something like 300 basis points so far in 2026. That's not a fluke — that's a shift. Luna: Is it a rotation out of growth into value? Or is it more defensive — people piling into income because they don't trust the rally in Chinese tech to last? Lucas: I think it's a bit of both. But let's ground this in numbers. EEM — the big EM ETF — is down about 0.7 percent over the last five days, and VWO is basically flat. Meanwhile, FXI, which is China large-caps, is up almost 5 percent. So there's a clear china tech led divergence. But the dividend index has been chugging along with less volatility. It's up about 8 percent year to date, versus the broad index at maybe 5. The dividend yield on that index is around 4.5 percent — that's real income. Luna: And the dollar has eased a bit — the trade-weighted dollar index dipped to 120.7 from 121.15 last week. That usually helps EM, but it also makes dollar-based income more attractive if you think the dollar stays range-bound. Lucas: Right. The yen strengthened, the yuan firmed a little against the dollar. But here's the wild card: the Fed minutes that came out today showed officials were split on the direction of rates. Some wanted to hold, some wanted to cut. So we don't have clarity on dollar policy. And that uncertainty tends to favor income strategies — because at least you're getting paid while you wait for direction. Luna: So what are the actual dividend stocks in EM that are working? I mean, is it the usual suspects — utilities, telecoms, state-owned enterprises? Lucas: Pretty much. In the MSCI EM High Dividend Yield index, the top weights are things like Taiwan Semiconductor — which actually pays a decent dividend — plus some Brazilian mining and energy companies, Chinese banks, and a few Indian companies. The Chinese banks like ICBC and China Construction Bank have dividend yields over 6 percent. That's real money, even if the growth narrative is muted. Luna: And the risk there is that if China's economy slows further, those dividends could get cut. But I suppose the market is already pricing in some of that pessimism. Lucas: Exactly. The banks trade at like 0.5 times book value. So you're buying a dollar of assets for fifty cents, and getting a 6 percent yield while you wait. That's a very different pitch from buying Alibaba at 20 times earnings with no dividend. Luna: Right. And Alibaba has been on fire lately — up 11.7 percent in five days. But it doesn't pay a meaningful dividend. So the question is: are investors rotating from those high flyers into dividend payers as they take profits? Lucas: I think that's happening. The flow data from EPFR shows that EM dividend ETFs have seen net inflows every week for the past two months, while broad EM equity funds have been mixed. There's a clear preference for yield right now. Luna: And that might be smart if the Fed doesn't cut and the dollar stays strong. But if the dollar weakens meaningfully, growth stocks could rip higher and dividend stocks could lag. Lucas: That's the trade-off. But I'll tell you, one thing that makes me favor dividends in EM right now is the geopolitical noise. You've got tensions in the Strait of Hormuz, oil spiking, the Dow down 500 points today. When the macro environment is this uncertain, getting paid 4 to 6 percent in cash while you wait for clarity feels pretty good. Luna: You know, it's funny — we talk about these trends every day, and it's easy to forget that this show exists because a small group of listeners actually makes it possible. We don't have ads, we don't sell data. It's just listener-supported. Lucas: Yeah, it's a pretty honest model. A handful of people chip in monthly through buy me a coffee dot com slash fexingo, and that literally covers the costs of keeping this thing going — hosting, research tools, the whole operation. Luna: If walking through the economy with us has made something click — a concept, an investment idea, whatever — that's the way to keep it rolling. No pressure, just a fact. Lucas: Anyway, back to the dividend shift. One specific example I've been watching: the iShares MSCI EM Dividend ETF, which trades under the symbol D-V-Y-E, has seen its assets under management grow by about 15 percent this year. That's a vote of confidence from institutional money. Luna: What's the yield on that fund? Lucas: Around 4.8 percent. And the expense ratio is reasonable — 0.49 percent. So net yield after fees is about 4.3 percent. Compare that to the 10-year Treasury at maybe 4.2 percent, and you're getting a similar yield with more upside potential, albeit more risk. Luna: But also more volatility. I mean, EM dividend stocks can still drop 20 percent in a bad year. Treasuries won't do that unless rates spike. Lucas: True. But the dividend index has a lower beta than the broad EM index — about 0.85 versus 1.0. So it's less volatile. And over a full cycle, it tends to hold up better in bear markets. In 2022, when the S&P 500 was down 19 percent, the MSCI EM High Dividend Yield index was down only about 12 percent. That's meaningful. Luna: So it's like a barbell: you have your China tech moonshots on one side, and your EM dividend payers on the other. The dividends give you a floor. Lucas: Exactly. And I think the interesting question for the second half of 2026 is whether this trend accelerates. If the Fed does eventually cut, dividend stocks could get a double benefit — lower discount rates increase the present value of those future dividends, and a weaker dollar boosts EM returns in dollar terms. Luna: But if the Fed holds and the dollar strengthens, dividends still win because they provide a yield buffer. So it's kind of a win-win within reason. Lucas: Right. The only real risk is a sharp economic downturn that causes widespread dividend cuts. But if you look at the payout ratios in the EM dividend index — they average around 40 percent — there's plenty of headroom. Companies aren't stretching to pay these dividends. Luna: What about country exposure? Are you mostly getting China, Brazil, and Taiwan? Lucas: Pretty much. The MSCI EM High Dividend Yield index is about 30 percent China, 20 percent Brazil, 15 percent Taiwan, and then bits of South Africa, India, and Malaysia. So it's concentrated, but those are the markets that tend to have higher dividend cultures — state-owned enterprises in China, commodity companies in Brazil, and so on. Luna: And that concentration risk is something investors need to be aware of. If China's property crisis worsens and the banks get hit, that 30 percent weight could drag the whole thing down. Lucas: Absolutely. But the banks are already priced for catastrophe. ICBC trades at 0.4 times book. The dividend is 7 percent. So the market is already assuming a pretty bad outcome. If the outcome is merely okay, those stocks could re-rate significantly. Luna: That's the value trap question, though. They've been cheap for years. Lucas: True. But cheap and getting cheaper is a different story from cheap and stable. If earnings stabilize, that 7 percent yield is actually quite safe. And in a world where the 10-year Treasury yields 4.2 percent, a 7 percent yield from a state-backed bank with a 40 percent payout ratio is not a bad risk-reward. Luna: So for listeners who are intrigued, what's the simplest way to get exposure? Is it the DVYE ETF you mentioned, or are there others? Lucas: DVYE is a good one. There's also the WisdomTree EM Equity Income fund, ticker d e m, which has a similar yield and a slightly different methodology. And for a more concentrated play, there's the Global X SuperDividend EM ETF, ticker s d e m, but that one uses options and has higher fees. I'd start with DVYE or DEM. Luna: And make sure it fits your overall EM allocation. If you're already heavy on China tech, adding more China via dividend banks might not diversify you as much as you think. Lucas: Good point. The bottom line is: EM dividends are having a moment. They're outperforming, they're seeing inflows, and they offer a real income alternative in a world where safe yields are still relatively low. But as always, know what you own. Luna: And don't chase the yield blindly. A 7 percent yield from a company with falling earnings is a trap. Lucas: Exactly. Alright, that's it for episode 100. We'll be back next week with another angle from the emerging markets landscape.