An unlikely new way to boost your portfolio yieldAugust 9, 2012: 5:00 AM ET
Income-starved investors have a surprising new option: dividend-paying stocks in emerging markets.
By Janice Revell, contributor
FORTUNE -- In a world where 10-year Treasury bonds are yielding a mere 1.5%, it makes sense that investors are flocking to blue-chip U.S. dividend-paying stocks to add income to their portfolios. But you might want to expand your horizons to a more unlikely source of yield: emerging markets. Companies operating in countries such as Brazil and China are known for their fast growth and roller-coaster returns. In recent years, though, they've been upping their cash payouts: The average dividend yield in emerging-market countries now tops 3%, compared with just over 2% for companies in the S&P 500 (SPX).
There's good reason to believe those dividends will keep on growing too. As businesses in emerging-market economies mature, they're returning more cash to shareholders. In part, that's to keep investors satisfied: When growth slows, companies need to deliver larger payouts to keep attracting foreign capital.
Some emerging-market companies have no choice but to pay hefty dividends. In Brazil, for instance, they are legally required to pay out at least 25% of their net profits. And many Brazilian companies, like beverage giant Ambev, go further than that: The world's fourth-largest beer-maker is required by its own corporate bylaws to pay out at least 35% of its net income and is currently paying a 3.8% dividend yield.
Signs that growth may be slowing in once-sizzling economies like China have been spooking investors in recent months, causing share prices to drop. But that presents an even better buying opportunity, say many experts. Russ Koesterich, global chief investment strategist for BlackRock's iShares business, points out that when the forward price/earnings ratio of the MSCI Emerging Markets index drops 20% below that of the MSCI World index -- as it has recently -- emerging-markets stocks subsequently outperform other regions over the next year. As a result, Koesterich currently recommends buying high-dividend stocks in Brazil, China, Indonesia, and Taiwan.
Financial planners generally advise that investors allocate at least 10% of their total stock holdings to emerging markets. Within those countries, stocks with the highest dividend yields have historically delivered the best performance, says Morningstar ETF analyst Patricia Oey. An easy way to gain exposure to a diversified basket of emerging-markets dividend stocks is through an exchange-traded fund. Two of Oey's top choices are WisdomTree Emerging Markets Equity Income (DEM) and iShares Emerging Markets Dividend (DVYE), which are currently yielding about 4% and 6%, respectively.
Investing in emerging-markets dividend payers won't always be smooth sailing, especially given today's volatile economic environment. But at least you'll be paid a relatively generous income to ride out the voyage.
--A former compensation consultant, Janice Revell has been writing about personal finance since 2000.
This story is from the August 13, 2012 issue of Fortune.