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Use This ETF For Chinese Dividend Growth

February 20, 2013 2:13 pm
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The recent proliferation of new dividend ETF has been duly noted. However, with investors continuing to put capital to work in income-oriented ETFs, some of the non-U.S. focused members of this group may be worthy of consideration as well.

Emerging markets and the corresponding ETFs are making their respective presences felt on the dividend scene. It is estimated that the 300 largest non-bank members of the MSCI Emerging Markets Index paid a combined $52. billion in dividends last year, up from just over $48 billion in 2011.

With emerging markets firms climbing the dividend ladder, some investors may be apt to wonder what the dividend outlook is in the largest developing nation of them all: China. In the essence of restraint, it is fair to say that China’s dividend picture is poised to improve. At the behest of Beijing, Shanghai-listed firms will are being prodded to to payout 30 percent of their profits in the form of dividends, and if they do not, they need to offer a good explanation as to why.

That effort could shine the spotlight on the newly minted WisdomTree China Dividend Ex-Financials Fund (NASDAQ: CHXF), which debuted last September. As its name implies, the ETF offers no exposure to Chinese banks, a stark departure from well-established funds tracking the country such as the iShares FTSE China 25 Index Fund (NYSE: FXI).

Skirting bank exposure is not necessarily a bad thing, particularly in the case of a China ETF. After all, that sector showed negative dividend per share growth last year. Given that Chinese banks are massive in size, 2012 dividend cuts by some of the sector’s constituents skewed overall Chinese dividend per share growth.

Dividend per share growth in China last year was just under 15 percent for all companies, according to Markit Equities Research. However, the best rates of growth were seen in the utilities, telecommunications and food and beverage sectors. Combined, those three groups represent nearly a third of CHXF’s weight.

That implies CHXF is ideally positioned to take advantage of rising Chinese dividends, a theme that has already been seen over the past decade. From September 2002 through September 2012, the trailing 12-month dividend growth on the MSCI China Index was over 17 percent. That beat the MSCI Emerging Markets Index, the MSCI EAFE Index and the S&P 500.

Notably, China is taking steps to foster dividend growth. The country said last year it would slash the dividend tax by 50 percent to encourage long-term investors to hold dividend-paying stocks for a year or more. Policymakers there have acknowledged that dependable, steady dividends are a way of attracting institutional investors with a long-term view of Chinese equities.

A deeper look at CHXF reveals the ETF caps sector exposure at 25 percent and single-stock weights at 10 percent. The fund’s top four holdings are all U.S.-listed and the yields on these names are decent. China Mobile (NYSE: CHL) yields 3.4 percent. Cnooc (NYSE: CEO) is the laggard at 1.7 percent while Sinopec (NYSE: SNP) yields 2.5 percent. With a dividend yield of 3.1 percent, PetroChina (NYSE: PTR) matches rival Chevron (NYSE: CVX) while outpacing Exxon Mobil (NYSE: XOM).

CHXF’s 23.7 percent exposure to the energy sector could prove useful going forward because all three of the aforementioned Chinese energy giants are state-run and plenty of governments, China included, have shown they want rising dividends from the companies they control.

For more on new dividend ETFs, click here.

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