Why High-Dividend Payers Have A Lower Beta

In fact, high dividend payers in emerging markets have a beta (a measure of the tendency of securities to move with the market at large) of only around 0.8 to the broader emerging market index. In other words, high dividend payers in emerging markets generally move around 0.8% for every 1% change in the overall emerging market universe. In a volatile market environment, this lower beta can help cushion the downside.

So why do high dividend payers have a lower beta? They tend to be more mature, established firms concentrated in less volatile industries. For example, the Dow Jones Emerging Markets Select Dividend Index has a heavy weighting to telecommunications and electric utilities, traditionally low beta sectors that tend to be less volatile than the broader market. In contrast, the largest industry in the broader MSCI Emerging Markets Index is financials, one of the most volatile sectors in recent years.

Why High-Dividend Payers Have A Lower Beta

Market Realist – High-dividend payers have a lower beta due to stability in their earnings.

High-dividend funds mainly invest in companies that provide high dividends—hence the name. Companies that give higher dividends tend to have stabler cash flows and less dependence on business cycles. Examples include utilities (XLU) and the telecom sector (VOX).

This tendency holds true for high-dividend emerging market funds as well. The graph above shows the beta for the MSCI Emerging Market Telecom Index and the beta for the MSCI Emerging Market Electric Utilities Index. These indices have market betas of 0.7 and 0.55, respectively, considering monthly returns for ten years. This means that funds like these shield you from excess volatility (VXX)—and excess volatility is a norm in emerging markets (EEM)(VWO). We used the MSCI Emerging Market Index as the base to calculate the beta.