By Michael Vodicka
Emerging markets were a brutal place to invest in 2014 and 2015.
While the S&P 500 gained more than 12% in that time, iShares Emerging Markets (NYSEARCA:EEM) fell into a bear market, declining 20%. That weakness was driven by a perfect storm of a strong dollar, falling commodity prices and slower than expected growth in China.
Today, emerging markets are showing signs of a long-term reversal. And it is creating a great opportunity for investors who are frustrated with record low yields and dividends in the United States.
In 2016, emerging markets have been among the best performing stock markets in the world. In the first eight months of the year, the iShares Emerging Markets is up more than 14%, almost tripling the return of the S&P 500. Take a look at the outperformance below.
Despite that impressive rebound, I see two reasons why it's still a great time to invest in emerging markets - particularly investors looking to pad their dividends.
Emerging Markets Are Undervalued
After posting big gains over the last two years, the S&P 500 is overvalued compared to historical averages.
Its current P/E ratio of 25 times is up from 21 a year ago, and is the highest it has been since before the financial crisis in addition to being among the highest in the world.
Meanwhile, emerging markets are on sale. iShares Emerging Markets is trading with a P/E ratio of just 12, a more than 50% discount to the S&P 500.
Emerging Markets Offer Better Yields
Not only are emerging markets undervalued compared to the S&P 500, they are also paying better dividends that are nearing a 5-year high. With the S&P 500 rallying in the last 12 months, its dividend yield has fallen to 2.1% from 2.2% last year.
Looking abroad, emerging markets are offering yields that are more than a 100% premium to the S&P 500 in some cases.
Below is a list of three emerging market stocks with yields above 3.5%:
|Source: Yahoo Finance|
From the group I have chosen to highlight Banco de Chile and Grupo Aeroportuario because of their combination of yield, value and growth potential.
Banco De Chile is one of the largest banks in Chile and South America and trades as an ADR on the New York Stock Exchange. Shares are up nearly 15% in 2016. That impressive performance has been driven by the bank's strong second-quarter results, beating expectations by 45%. Despite those gains, Banco de Chile offers one of the best banking-sector dividends in South America. Its current yield of 4.35% is at a more than 100% premium to the S&P 500.
Grupo Aeroportuario is one of the largest airport operators in Mexico. Shares are also traded as ADRs in the United States through over-the-counter (OTC) markets. With air travel in Mexico surging, OMAB is having a great year. Shares are up 18.5% in 2016. OMAB is on pace to grow earnings 41% in 2016 and another 10% in 2017. OMAB has used its earnings power to grow its dividend, up more than 475% in the last five years. That has OMAB offering a 3.58%.
Risks To Consider: When investors get nervous, they sell emerging market stocks before they sell U.S. stocks. On the dividend front, companies using more leverage on the balance sheet are more susceptible to dividend cuts than companies using less leverage.
Action To Take: Income investors discouraged by low yields and interest rates should take a fresh look at emerging markets. After a tough couple years, emerging markets are crushing the S&P 500 in 2016. Not only are they undervalued compared to the S&P 500, many also offer superior yields.
This article originally appeared on StreetAuthority.com.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.