DEM - DEM: A Purely Dividend Play

2023-08-08 11:31:02 ET

Summary

• WisdomTree Emerging Markets High Dividend Fund ETF focuses on high yielding dividend plays in emerging markets, with a high concentration in Asia.
• The fund has a high concentration in sectors such as Financials, Materials, Energy, and surprisingly, Information Technology.
• The top 10 stocks in the fund account for about 30% of its total weight, including well-known American stocks and Chinese companies.
• The fund has a history of underperformance and all its returns seem to come from dividends alone.

WisdomTree Emerging Markets High Dividend Fund ETF ( DEM ) is a fund that invests in high yielding dividend plays in emerging markets as the name of the fund suggests. The fund invests its assets in many countries but the top 5 countries account for 81% of its weight. In fact, the top 2 countries (Taiwan and China) account for about 56% of its total weight. With the exception of a few countries like Brazil, South Africa, Mexico and Chile, it's safe to say that the fund invests almost all of its assets in Asia so it has a high concentration in terms of geographical distribution.

The fund also has a high concentration in terms of sectors where the top 4 sectors account for 82% of its weight and top 2 sectors accounting for 46% of it. It's no surprise that the fund has heavy exposure to industries such as Financials, Materials and Energy because this is typically where high yielding stocks are at. I am more surprised at Information Technology being the second highest weight in the fund considering this sector isn't known for high yields. Combining this with the information above, we can say that this fund mainly focuses on Financials, IT, Materials and Energy sectors in Asian countries with some other regions added to the mix.

Even though the fund has about 450 stocks, the top 10 stocks account for about 30% of its total weight. On top of the list we see several high yielding stocks that are well-known to American investors such as Vale ( VALE ) and Petrobras ( PBR ) but we also see a lot of unknown names such as MediaTek, Hon Hai Precision Industry Co. ( HNHAF ) and Nan Ya Plastics Corp ( NANYF ). We also see a lot of Chinese companies some of which have close relationships to the Chinese government such as China Construction Bank ( CICHY ), PetroChina ( PCCYF ) and several other large Chinese banks.

Almost all of the fund's dividends come from the dividend payments it receives from its holdings. It doesn't do much in terms of distributions of capital gains or return of capital. Some of the fund's holdings are known for having pretty high dividend yields such as Petrobras which generally pays about 50% of its cash flow in dividends which results in dividends as high as 30-40% in some years since the company's P/E is as low as 3.

Since the fund is overweight in Chinese banks, investors who own this fund might want to keep an eye on the country's banking system. Over the last few decades, government-backed large banks in China lent trillions of dollars to the country's local governments, real estate developers and many other entities in order to fuel the country's economic growth. In addition, Chinese banks lent significant amount of money to China's trade partners and foreign countries in order to obtain certain political and economical favors. While this is all good for the sake of growing, there is a real risk that significant portion of this debt might not be repaid anytime soon if ever. This is why it's important to keep an eye on many of this fund's holdings such as China Construction Bank, Industrial & Commercial Bank of China and Bank of China. Together, Chinese banks account for about 10% of the fund's total weight which is significant.

The fund has been around for close to 2 decades and its returns haven't been impressive so far. The fund's share price has been down -25% since inception and its total return is about 56% which is only about 2.5% compounded annual average which barely keeps up with the inflation.

The fund currently has a dividend yield of 7.05% which is close to its all-time high. Historically the fund has had a yield of 3-4% so the current yield could be considered an exception, most likely supported by higher than average yield we saw from many material and energy companies as we saw a boom in commodity prices but this may not last for long. Moving forward, it's hard to tell what kind of yield to expect from the fund.

The fund's dividend history shows some growth in per-share dividends but most of the growth was driven in the last 2 years, especially last year because of the commodity boom.

When investing in emerging markets, one thing investors should pay close attention to is currency risk. Many times countries in emerging markets tend to have weaker currencies as compared to currencies from more established countries such as the US dollar. For example, if your Chinese stocks rally 10% in a year but China's currency loses 10% value against the US dollar, your total return will be close to 0% during that year if you are an American investor who uses the US dollar in your day to day life. Since this fund is concentrated in several countries, the currency risk might be lower but it's still there.

Another thing to consider is that different countries have different taxing levels and strategies in dividends paid to foreign investors. Luckily you won't have to worry about specific tax levels and policies of different countries because the fund deals with it but it's important for you to know that this can affect your total returns in the long run. For example, if the fund shifts more of its assets to countries with higher taxation, it could reduce your overall return or if it does the opposite, this could improve your overall return, assuming everything else is held constant.

Even though many of the fund's holdings are very cheap stocks with single digit P/Es, I don't expect much upside from this fund because cheap stocks can remain cheap for a long time, especially in sectors that are chronically cheap such as finance, energy and materials which this fund is overweight in. In the past, most of the fund's returns came directly from dividends with very little (if any) capital appreciation and I don't expect this to change anytime soon. In all likelihood, this also means that the fund will continue to underperform for the foreseeable future.

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