Brazil's Dividend Problem

More than seven months into the year, it is now widely known that emerging markets ETFs have struggled. Brazil funds, former darlings of the emerging markets ETF lot, have been among the most egregious offenders.

Not only has the iShares MSCI Brazil Capped ETF (NYSE:EWZ) been the worst performer among the four major funds tracking the BRIC nations, EWZ has been plagued by steep outflows. Year-to-date, investors have pulled $2.3 billion from EWZ, the largest Brazil ETF, ranking the fund seventh on the top-10 list of worst year-to-date outflows, according to BlackRock data.

EWZ now has a tempting 30-day SEC yield of 3.21 percent and a trailing 12-month yield of nearly 3.1 percent, but investors may want to think twice before embracing Brazilian large-caps as legitimate dividend plays.

While U.S. payouts are on the rise, the same cannot be said of Brazilian dividends. "Markit Dividends expect an 8% fall in pay-outs to shareholders to 60 billion Brazilian real this year," said the research firm in a report published last week.

It is a pair of usual suspects that are problematic for Brazilian equities on the dividend front. Those being state-run oil giant Petrobras (NYSE:PBR) and Vale (NYSE:VALE), the world's largest iron producer.

"The decline in the aggregate change over 2012 was primarily related to cuts from Petrobras, Vale and most Utility companies (who were forced to cap their charges)," said Markit.

Two Petrobras securities and two Vale securities combine for almost 20.7 percent of EWZ's weight. The utilities sector is 6.7 percent of the $5.55 billion fund's weight, according to iShares data.

There is more evidence to suggest other emerging markets currently stand as superior dividend destinations compared to Brazil. Research published by WisdomTree last month indicates Brazil is just 2.1 percent of the WisdomTree Global Dividend Index.

That puts Latin America's largest economy in a tie for second with Russia for largest weight to a developing economy in that index, but Brazil was just one of three emerging markets to see its dividend stream decline. South Africa and Taiwan were the others.

In the WisdomTree Global Dividend Index, Brazil is merely the third-best emerging markets dividend payer in dollar terms, trailing China and Russia. While Brazil's payouts have been declining, countries such as Thailand and Russia have been showing impressive growth.

Still, hope is not entirely lost for Brazilian payouts. Credit growth could spur dividend increases from Brazilian banks, said Markit. Financials are EWZ's largest sector weight at almost 27.5 percent and the Global X Brazil Financials ETF (NYSE:BRAF) has a trailing 12-month yield of almost 3.7 percent.

Brazilian "Sectors with the highest expected rate of dividend growth Y-o-Y are Consumer Discretionary, Industrials, and Financials with 34%, 25%, and 19% increases respectively," said Markit.

Industrial and discretionary names combine for about 11.6 percent of EWZ's weight. The Market Vectors Brazil ETF (NYSE:BRF) allocates over 37 percent its weight to discretionary stocks while industrials and financials combine for another 27.5 percent, although BRF's 30-day SEC yield is just 1.77 percent.

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