Jim Jubak: Emerging-market bonds that compensate dividends - MSN Money

When emerging stock markets hand you lemons, make lemonade.

Specifically, dividend-paying lemonade.

So far, 2010 hasn"t exactly been kind to emerging-market stocks. An index-tracking exchange-traded fund, iShares MSCI Emerging Markets Index (EEM, news, msgs), declined 6.4% from Dec. 31 through Feb. 8.

Individual emerging-market ETFs did even worse. The iShares MSCI Brazil Index ETF (EWZ, news, msgs) dropped 15.8% over the same period. The iShares FTSE/Xinhua China 25 Index ETF (FXI, news, msgs) fell 12%. The iShares MSCI BRIC Index ETF (BKF, news, msgs) of stocks from Brazil, Russia, India and China went down 13.4%.

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So how do you make lemonade from these lemons? Especially when it"s not clear whether these markets, which have tumbled on worries about a slowdown in China"s economic growth and on fears that the budget crisis in Greece could spread to the rest of the European Union, are done falling?

Think dividends.I grant you that dividends and emerging-market stocks aren"t two concepts that immediately jump to mind together. Most emerging-market stocks don"t pay dividends for the same reason that most startup companies anywhere don"t pay dividends: They"ve got plenty of extremely profitable places to invest every bit of internally generated cash.

Other emerging-market companies don"t pay dividends because nobody else does in their local stock market or because it"s not in the culture, or, well, for countless reasons that have to do with what can be the ins and outs of convoluted ownership structures.

Still, some emerging-market companies do pay dividends, largely in the electric utility and telecommunications sectors.

Even in emerging markets, the shares of companies like these use dividends to attract investors because they"re in capital-intensive businesses and are constantly on the lookout to raise capital. Dividends are one way to ensure they have a steady demand for new shares.

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Sometimes dividends are paid in sectors and industries you probably wouldn"t expect. For example, I don"t know why China Nepstar Chain Drugstore (NPD, news, msgs), the largest retail drugstore chain in China, has paid a hefty 5.63% dividend over the past year, but it has.

In the rest of this column, I"ll give you some caveats for dividend investors that are especially important to investing for yield in emerging markets, then identify four dividend plays -- three for further research and one that I"m going to add to my dividend income portfolio on Friday. (For some help in figuring out an asset allocation that includes these emerging-market plays, see my blog post "How to build a global portfolio.") Yes, dividends, but when? Cash flows from dividends in emerging-market stocks can be unevenly distributed during the year. So it"s smart to pay close attention to when they"ve paid dividends historically. You can wind up waiting a long time between a company"s payouts or discover that you"d just missed one of only two payouts during the year or the biggest of the year"s uneven payouts.

Look at the pattern at Brazilian electric utility Centrais Elétricas Brasileiras (Electrobrás) (EBR, news, msgs), for example. In the past two years the company has paid out two sets of dividends. On May 5, 2009, Electrobrás paid out a cash dividend of 2.66 cents a share and a special cash dividend of 61.84 cents a share. This year, on Feb. 1, the company paid out a cash dividend of $1.1947 a share and a special cash dividend of $1.329. I couldn"t tell you exactly how long you"d have to wait for the next payout or what it might be.

Remember that these are emerging markets and that the fortunes of even a stodgy utility or telecommunications company in the United States or Japan can turn on a dime on a change in regulation or a shift in government that favors one player over another.

That"s exactly what overtook Turkcell Iletisim Hizmetleri (TKC, news, msgs). The Turkish government introduced mobile phone number portability (so that users who switch carriers get to keep the same phone number) in November, and that"s set off a war. Turkcell has maintained its subscriber growth rate, but increased churn (as customers switch providers) and deeper discounts to attract new customers have cut average revenue per user by about 20% in the fourth quarter. I don"t think that endangers the stock"s current 4.8% yield, but it could well keep a lid on any price appreciation in the shares.

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