Almost all do-it-yourself investors who are reading about emerging markets would be aware of BRIC acronym. BRIC stands for Brazil, Russia, India, and China. This BRIC label clubs four distinct emerging markets into a single entity. Based on this labeling, there are many different mutual funds, closed-end funds, and ETFs. What is ironical is there is no similarity except that they are supposed to be the new growing economies. Each of these countries have different governance structure, different governance policies, different types of economies, different strengths, different financial markets, different values, etc., Even with these differences they are clubbed together and viewed as single entity for investing in emerging markets. This is again one of the follies of Wall Street investment firms (think GS!). To top it off GS and other investment firms seems to have more lenient bent towards China’s market among the BRICs. Is this because these firms get more business in China? I am not sure if there is an open answer to this one. But clubbing all these countries under BRIC acronym does not make sense to me. continue reading rest of the article….
The third the
- Risk manage
ment is a must. In my dividend portfolio, the risk to dividend (or passive cash flow) is so mething that I must take into account. I must provide myself a mechanism to measure this risk (infrastructure!) in my dividend portfolio.
- I need to position myself and invest in e
merging markets. All of the existing S&P500 dividend aristocrats started raising dividends in 1970s and rode at the back of US economic growth. Similarly, if I can sow dividend seeds in e merging markets now, I can possibly ride the growth story. The challenge is to find the right invest ment vehicles from a small individual investor perspective.
- The asset allocation model in this book is not oriented towards individual investors. But if I understand the funda
mental basis on which it is build, I believe it will provide megood guideline to fra memy individual portfolio.
I believe the book was worth a read for these three
In today’s post, I will discuss how El-Erian’s emerging market theme affects the dividend investors (DIs). Some of the characteristics that we DIs look for in a company are as follows:
- Management’s sincere conviction that shareholders have stake in the business and earnings must be shared with them;
- Dividends are paid from operating earnings;
- Consistent growth in dividends can be maintained only if there is consistent growth in earnings; and
- Dividend focused investing is a long term (i.e. 25-30 years) preposition.
Looking at the dividend aristocrats, one can see that they have had a pretty decent ride for the last 30-40 years on the back of growth in US economy. Along with the US economy, these companies were consistently growing their revenues (and hence the earnings). Managements consistently shared this bounty with the share holders. Now today, in general, dividend aristocrats as a group are struggling to find new source of growth in revenue and earnings. Most of the dividend aristocrats (not all of the companies) are focusing to increase earnings from internal efficiencies or cost reduction initiatives, because they are hard pressed for growth in revenue. How long this can continue? Dividend investing is long term process. Therefore, I foresee that the pool of companies in dividend aristocrat will continue to decrease.
For DIs, this is where the El-Erian’s emerging markets theme comes into play. According to the author, emerging markets will be growing faster and provide higher contribution to earnings in next 30-40 years. In that case, doesn’t it make sense to invest in dividend-based companies in emerging markets? For a moment let us think that international and emerging markets as foreign markets.
One of the issues for DIs is that there is very little public information on companies in foreign markets. If companies do not have ADRs then it is difficult, if not impossible, to find the details of such companies. Additionally, the regulatory framework and governance may not be as advanced as developed world. Here I am comparing the basic minimum requirements and not a full-proof system.
Other way to look at this is US companies or multinationals who get most of their earnings from foreign markets. Such companies have operating history, dividend payment history, management’s performance, presence in US markets, etc. Recently, there was an article on The Div-Net by Dividend Growth Investor which discussed about top 10 companies in S&P500 index and their source of earnings. This article brings out the fact that top 10 companies by weightage in S&P500 index (with approximately 22% contribution to index) derive 44% of total financial contribution from foreign markets. It is likely that if we dig deeper, we will find more such companies and this 44% contribution may even surpass 50% cumulatively for all S&P500 index companies. While we do not have the same investment vehicles as used in El-Erian’s example, the Harvard Endowment Fund, we DIs surely have US-based companies and/or multinational companies. Investing in such companies provide a very good vehicle for investing in international and/or emerging markets.
For us DIs, this is a good fit to El-Erian’s theme of long-term earnings growth in emerging markets. Also it helps us build dividend portfolio using the existing US financial infrastructure.
In the last post, I presented El-Erian’s major the
The discussion of the asset allocation in this book should be viewed as reflection of author’s understanding of the world of finance. It is the result of author’s belief and conviction on how financial markets are evolving. I do not interpret this as a guideline, fra
Among others, one of the key characteristics of dividend-based investing is:
ment’s sincere conviction that shareholders have stake in the business and earnings must be shared with them;
Now let us compare this characteristics with one of El-Erian’s world colliding the
It is highly likely that dividend investors (DI) may not invest in funds, companies, and/or institutions that only do business in derivatives domain. Only because they do not have any background history associated with it. DI’s are looking for companies with dividend history and sincere manage
The author does not com
In that case, I interpret this as it is acceptable for companies to use derivatives to an extent where risk of loss is understood and manageable. In other words, use it but do not over expose; one of the basic tenets of portfolio manage
Since the post is becoming long, I will discuss the the