An 8% Dividend Yield That's Perfect For This Market

David Dierking

With large-cap equities yielding less than 2% and 10-year Treasuries earning less than 1%, it's safe to say that it's been a challenging environment for yield seekers.

While the natural reaction might be to delve into REITs and junk bonds to find higher yields, I feel that investors should be searching overseas instead of here at home.

High Yields From Emerging Markets Stocks & Bonds

I'm talking about emerging markets. That applies to both stock and bonds, where some very enticing yields are being spun off by these regions right now.

One great example of this on the equity side is the iShares Emerging Markets Dividend ETF (DVYE). With a current yield of more than 8%, DVYE combines the opportunity for both high yield and capital growth.

DVYE targets 100 high-yielding stocks from emerging markets nations, excluding REITs.

Its focus almost exclusively on high yielders exposes the portfolio to the additional risk of overweighting beaten down stocks or those at risk of a dividend cut, but DVYE over time has managed to keep overall risk at a moderate level.

Top Holdings

Emerging markets, in general, are heavily weighted towards China and DVYE is no exception.

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DVYE is a bit more diversified though, underweighting China, and overweighting countries, including Russia and South Africa.

Unlike like the U.S. stock market, which is heavily weighted to tech, DVYE is heavily weighted in cyclicals.

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Financials, energy and materials comprise nearly half of the overall portfolio.

Emerging markets, in general, are cheaper than U.S. stocks, but DVYE is especially so.

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Trading at just 7 times earnings, DVYE is ridiculously cheap, even by emerging markets standards. And the 8% yield it's currently offering is about as high as it's ever been.

Is the 8% yield sustainable? That's a good question. In recent years, DVYE's yield has been in the 5-7% range, so its current yield of 8.3% is far above normal. I'd expect that this yield will probably come back down to earth, but a longer-term yield in the 7% range could be a reasonable expectation.

That probably comes as a result of both share price appreciation and a few dividend cuts that are yet to be accounted for, but the total return potential of emerging markets equities, especially high yields, is particularly attractive right now.

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