Why Emerging Markets Are A Gold Mine for Income Investors

Anyone that has even a passive interest in investing has probably heard great things about the world's emerging markets. Given their hefty triple-digit returns in recent years and the likelihood of more gains on the horizon, it's not surprising that this corner of the market has captured so much attention lately. But despite all the high-flying stocks that everyone is eager to buy, there is a different story that doesn't get a lot of press -- the companies paying fat dividends and distributions.

Looking Abroad
In years past, most of the world's stock market value was locked up in the United States. However, trillions of dollars of wealth have been created overseas in the past decade.

We may have hundreds of great companies here in the U.S. to choose from -- but there are literally thousands elsewhere around the world. Take banks, for example. In terms of assets, seven of the top ten banks (always strong dividend payers) in the world are foreign-based companies. This means most U.S. investors looking to invest in a high-yielding bank stock are limiting themselves to only 30% of what is available. And the story is similar across most other industries, from retailers to steel makers to electronics manufacturers -- many of the top payers are located outside the U.S.

Clearly, there is something to be said for casting a wider net, and those that have done so have been well rewarded through total returns. Over the past 15 years, the U.S. has not been the top-performing stock market in any given calendar year. In 2007, for example, the +5.5% return of the S&P 500 was well below average. The broader emerging markets returned 42%, and individual countries fared even better. China which received the most attention saw increases of 69%. Countries such as India and Peru saw even better returns and led the emerging markets with returns near 80%.

Over the past five years, the S&P 500 has delivered average gains of about +12.5% per year. While that return is respectable, it lags most foreign benchmarks -- stocks have jumped +17% per year in Pacific Asia, +21% per year in Europe, and +47% per year in Latin America over the same time frame.

While the story might change from country to country, the overall economic outlook for the developing world is bright. Naturally, this heady growth should translate into tremendous gains and rising dividends for investors in the years ahead.

Riding the International Wave
The U.S. economy is the most advanced and industrialized nation in the world. As a result, the country cannot continue to grow at the same pace it has over the past century. In fact, annual growth of just +3-4% is now considered robust for a large, developed economy.

But similar to America at the turn of the century, many emerging markets are still very early in their development cycle and are just now beginning to hit their stride. And just as U.S. stocks have created hundreds of billions in wealth over the past few decades, dominant companies in the world's developing markets could do the same in the coming years, rewarding investors with capital gains on top of those hefty yields.

This growth will be fueled by a number of factors. Asian economies, for example, are becoming important bases for global manufacturing operations. In China for example, major multinational companies are taking advantage of low labor costs by moving manufacturing jobs there.

Meanwhile, infrastructure throughout Asia continues to grow, and that rapid expansion has led to high demand for basic materials like copper, steel, and energy (oil and natural gas). Prices for these basic commodities are rising to levels unseen in two decades, and as a result, commodity-rich economies across Latin America are benefiting.

At the same time, many emerging markets are enjoying a booming export business. South Korea is a world-class manufacturer of ships and automobiles, as well as semiconductors, wireless equipment, and other electronics. Driven by strong demand from nearby China as well as consumers in the West, the exportation of these products has surged, pushing the country's GDP above $1 trillion. 

Finally, many emerging markets are benefiting from regulatory reforms, cross-border trade, and loose monetary policy. And of course, as the disposable incomes of these densely populated regions continue to rise, we expect these nations to see sustained growth in consumer spending power in the years ahead, boosting earnings for retailers, financial services providers, and a host of other industry groups. 

That being said, stocks in emerging markets have delivered stellar gains over the past few decades. According to a study by Vanguard, emerging market stocks produced average annualized gains of nearly +15% between 1973 and 2003, easily outpacing the +11.5% return of those in the U.S.

To put those numbers into perspective, consider this: a $100,000 investment earning +11.5% for 30 years would grow to about $2.6 million -- a very respectable sum. However, if you were able to invest that same $100,000 at +15% per year, then you'd end up with over $6.6 million -- an improvement of $4 million.

Going forward, this sort of emerging market growth should translate into superior corporate profitability and impressive gains for investors. But best of all, this growth will mean many foreign companies will be generating substantial amounts of cash, the major catalyst for rising dividend payments.

In a recent issue, we located one fund that invests solely in the best companies in Central and Eastern Europe, Russia and Turkey -- all considered emerging markets. The performance of this region of the world has been so great, it has allowed the fund to pay investors distributions of $5.52 per share in 2006 and $10.26 per share in 2007 -- for a yield of 21%! And over the last five years, the fund has had a market return of more than +37% annualized. Results like this shows it literally pays to invest abroad.

This is the exact reason why I started High-Yield International -- the only newsletter dedicated to income opportunities available abroad. There is a crying need for U.S. investors to know that they don't have to settle for the puny yields offered stateside. By simply expanding your investment horizons, you can be earnings yields of 10%, 14%, even 21% or more!

Visit this link to learn more about High-Yield International.

-- Nick Lanyi
Editor, High-Yield International