DEM: Not A 'Sleep Well At Night' Dividend

seekingalpha02-13

The WisdomTree Emerging Markets High Dividend Fund ETF offers a dividend of 5.51% and the potential for capital gains if emerging markets catch up with the US.The fund's high turnover rate impacts the...

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AsianDreamAn interesting theme for 2024 is whether or not the US stock market will continue to outperform the rest of the world, and especially emerging markets. The gap in valuations is being stretched ever wider and could snap back soon. However, waiting for the rest of the world to catch up with the US can be like waiting for Godot. But what if we can be paid while we wait? This is why the WisdomTree Emerging Markets High Dividend Fund ETF (NYSEARCA:DEM) caught my interest. It offers a very decent dividend of 5.51% and should emerging markets finally catch up with the US, then the capital gains could be appealing too. A Closer Look at DEM According to the WisdomTree quarterly factsheet, DEM is a passively managed fund which \"seeks to track the price and yield performance, before fees and expenses, of the WisdomTree Emerging Markets High Dividend Index.\" The 0.63% expense ratio is quite high for a passively managed fund, and while I think expense ratios are not always relevant to volatile ETFs, anything bought for a dividend will lose a good chunk when 0.63% is lost over the course of the year. DEM pays a solid 5.51% (TTM) dividend, which is distributed quarterly. This is attractive, but I do have some concerns with the fluctuating distributions. The pay-outs in 2023 were less than 2022 and 2021, and indeed 2014. I would much prefer to see a steady (or even better, steadily rising) pay-out.   Dividend History (Seeking Alpha)The varying distributions are obviously related to the composition of the index. According to the Prospectus, there is a high turnover rate. During the most recent fiscal year, the Fund’s portfolio turnover rate was 43% of the average value of its portfolio, excluding the value of portfolio securities received or delivered as a result of in-kind creations or redemptions of the Fund’s capital shares. This high turnover relates to the way the underlying index is composed.  The Index is a fundamentally weighted index that is comprised of the highest dividend-yielding common stocks selected from the WisdomTree Emerging Markets Dividend Index, which defines the dividend-paying universe of companies in emerging markets throughout the world. To be eligible for inclusion in the WisdomTree Emerging Markets Dividend Index, a company must meet the following criteria as of the annual Index screening date:  (i) payment of at least $5 million in cash dividends on common shares during the preceding annual cycle;  (ii) market capitalization of at least $200 million; (iii) median daily dollar trading volume of at least $200,000 for each of the preceding six months;  (iv) incorporation within one of 18 emerging market nations (Brazil, Chile, China, Czech Republic, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Philippines, Poland, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, and Turkey); and  (v) trading of at least 250,000 shares per month for each of the preceding six months.  Securities eligible for inclusion in the WisdomTree Emerging Markets Dividend Index are ranked by dividend yield. Securities ranking in the highest 30% by dividend yield are selected for inclusion within the Index. If a company currently in the Index is no longer ranked in the top 30% by dividend yield at the time of the annual Index screening date but remains ranked in the top 35% by dividend yield, the company will remain in the Index.  This process selects the highest yields from liquid stocks, but it clearly leads to a variable pay-out and a high turnover. It also incurs high transaction costs, which is another drag on performance. The index incorporates further filtering processes such as quantitative risk screens which aim to improve the quality of the stocks selected. The fund currently has 489 holdings, which are broken down below:   DEM Holdings (Seeking Alpha)There are some familiar names in the top 10 holdings, but also a lot of exposure to Chinese companies. This is shown in the country exposure breakdown from the fund site:   DEM Country Allocation (WisdomTree)Emerging market ETFs will almost always have exposure to China, but when I see 20.80% exposure, and 22.90% to its neighbour Taiwan, I do get nervous given the poor performance of Chinese stocks over the last three years. This wouldn't bother me too much if I were to initiate a high-risk trade on a Chinese turnaround, but DEM is primarily a dividend play and I like my dividend portfolio to be relatively safe. Other fund metrics for DEM bring up no red flags. It is a large fund with $2.67B AUM. Liquidity is ample, with an Average Daily Dollar Volume (3M) of $13.31M. As we saw with the fund selection process, only liquid stocks are selected. Attractive Valuations Valuations are getting frothy in the US as the S&P 500 (SPY) has a PE ratio of 22.37 compared to 19.97 a year ago, while the Nasdaq (QQQ) is a worrying 31.72 compared to 23.63 a year ago. Valuations in other countries are much lower, and the estimated PE for DEM is only 7.4. This is low for a reason, as high rates in the US and across the globe are a major headwind. However, the Fed is expected to cut this year and other emerging market countries are already cutting.   Hiking/Cutting Cycles (IMF)There is plenty of potential for multiple expansion should rates come down as expected, and this could lift DEM from its current price of $40.54 towards the 2021-2022 double top of $47.66. Risks The risks of investing in emerging markets are relatively high, and this is what bothers me about holding DEM as a dividend play. As the prospectus highlights: ...instruments traded in developing or emerging markets, or that provide exposure to such securities or markets, can involve additional risks relating to political, economic, or regulatory conditions not associated with investments in U.S. securities... There is a large section dedicated to the risks involved with investing in China. To conclude, this is not a \"Sleep Well At Night\" addition to your portfolio. Conclusions  DEM offers an attractive dividend of 5.51% and exposure to emerging markets, which could be poised to outperform and catch up with high valuations in the US. My main reservation is with the fluctuating distributions and high turnover rate in the fund's holdings. I like my dividends to be safe and reliable, and DEM - and indeed emerging markets in general - are not a good fit for my income portfolio.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"CCBot/2.0 (https://commoncrawl.org/faq/)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.26.3","shortVersion":"4.26.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2411311653"}