Dividends, Diversification and Destiny: Oh My!

Dividends, diversification and destiny: It would be challenging to assemble three better stock qualifiers (while abusing the literary concept of alliteration) than these. Let’s see why.

Dividends – Dividends are of enormous importance to investors. According to a report by Guinness Atkinson Funds, on average, dividends accounted for between 27 percent and 60 percent of the S&P 500 total return for all 1 and 20 year periods since 1940. If you aren’t focused on dividends, you’re missing out big time.

Diversification – Diversification is so important, but investors sometimes struggle to apply it properly. Owning different types of assets (i.e. non-correlated) is critical to portfolio construction and risk management. It smoothes out returns by having some holdings rise while others fall and it enables investors to profit from many different types of asset classes.

Destiny – Destiny is accurately identifying the path an investment is headed down. Investing in the companies that are heading the right way, “destined” for profitability, will directly translate into a bigger pile of money in your brokerage account.

The Emerging Markets Boom

Emerging markets have been on a path of destiny for years. As an asset class, emerging markets have grown from a once avoided segment to one of near universal inclusion. I can remember the days when emerging markets were considered “too risky” for average Jane and Joe investors.

Today, despite the bumps in the global economic road over the past few years, emerging markets continue to provide some of the more compelling opportunities for investors.

Here are a few investment ideas for in emerging markets:

Brazilian metals and mining company Vale SA (NYSE: VALE) is the world’s largest iron ore producer and a major exporter to China.

The stock has some attractive statistics, including a five-year average dividend growth rate of 20.28 percent. Its current dividend yield is 5.77 percent with a payout ratio of 50 percent. Its annualized earnings per share (EPS) five-year average growth rate is 24.30 percent.

Vale will face some challenges because its future is closely linked to that of China’s domestic steel industry. And China is producing more steel domestically, which could reduce its demand for steel from Vale.

But Vale isn’t sitting on its hands. It continues to develop and deepen trade relationships in South America, South Africa and other developed and emerging markets which should offset any potential revenue reduction from China.

I think the stock established a bottom in 2012 of about $17.00 per share and I see resistance between $21.00 and $22.00 per share (see graph below). Look for Vale to push through that level in the future and enjoy the dividends in the meantime.

Chinese coal producer Yanzhou Coal Mining (NYSE: YZC) has some appealing numbers to consider as well. 

Thanks to successful mining operations in China and Australia and as an exporter to other countries, it has a five-year average dividend growth rate is 41.93 percent with a current dividend yield of 5.50 percent.

Its dividend payout ratio is a measly 30.69 percent. It also sports an annualized EPS five-year average growth rate of 36.04 percent.

YZC is obviously dependent on China’s economy. But that is just fine. As China’s economy regains some of its past momentum, YZC will capitalize. 

There are just far too many people waiting to move into the middle class in China. To meet that massive demand, there’s going to be a whole lot of coal burned.

YZC is a good, long-term opportunity. And its shares also seem to have bottomed in 2012 (see below). I see the risk of a pullback to $14.00, but ultimately a rise to levels not seen in years.  Tuck this one away and pocket those dividends.

Brazil’s Braksem SA (NYSE: BAK) is a producer and distributer of basic petrochemicals and thermoplastic resins in Brazil and internationally. 

BAK has a five year average dividend growth rate of 29.98 percent and a current dividend yield of 4.26 percent. Its annualized EPS five-year average growth rate is 31.79 percent.

Braksem released earnings in on February 7. Good news…

Sales were up 10 percent in 2012 and BAK posted a fourth-quarter profit on net income of 275 million reals ($138 million). That’s a huge improvement from a loss of 172 million reals the year prior. EBITDA was up nearly 100 percent from the year before at 1.399 billion reals.

The stock jumped in the aftermath of the press release, but I think it has more to go (see graph below). Volatility will remain but the outlook for BAK is up.

For those who prefer nice tidy packages I suggest the SPDR Emerging Markets Dividend ETF (EDIV). EDIV is, as its name suggests, an exchange traded fund (ETF) focused on emerging market dividend paying stocks. 

The fund is indexed to the S&P Emerging Markets Dividend Opportunities Index but it is not an index fund. Its allocation differs from the index.

This ETF is well diversified with over 100 holdings in many regions in and out of the BRICs. The top ten countries represented are as follows: 1. Brazil 23.97 percent; 2. Taiwan 17.98 percent; 3. South Africa 10.88 percent; 4. Turkey 9.37 percent; 5. Russia 7.58 percent; 6. China 7.48 percent; 7. Poland 5.47 percent; 8. Thailand 4.10 percent; 9. Czech Republic 3.56 percent; and 10. South Korea 3.31 percent. 

EDIV has a current dividend yield of 5.42 percent, topping off a fund worth considering.

Needless to say, emerging markets will continue to be very important to investors.  And thanks to the global economic slowdown over the recent past there are a lot of good values to be had. Just remember the “Three D’s.”

Steven Orlowski is a 20-year veteran of the investment business. He has worked for some of the most prestigious firms in the world in a variety of capacities, including portfolio manager, trader and high net worth financial planner.

Tweet