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When emerging stock markets hand you lemons, make lemonade.

Specifically dividend-paying lemonade.

So far 2010 hasn’t exactly been kind to emerging market stocks. The ETF (exchange traded fund) that tracks the iShares MSCI Emerging Markets Index (EEM) was down 6.4% from the close on December 31 through the close on February 8.

Individual emerging markets did even worse. The iShares MSCI Brazil Index ETF (EWZ) was down 15.8% from December 31 to February 8. The iShares FTSE/Xinhua China 25 Index ETF (FXI) was down 12%. The iShares MSCI BRIC Index ETF BRIC) of stocks from Brazil, Russia, India, and China was down 13.4%.

So how do you make lemonade from these lemons? Especially when it’s not at all clear that these markets, which have tumbled on worries about a slowdown in China’s economic growth (for more on why I think that worry is overstated see my post ) and on fears that the budget crisis in Greece would spread to the rest of the European Union, are done falling.

Think dividends.

Now I grant you that dividends and emerging market stocks aren’t two concepts that immediately jump to mind together.  Most emerging market stocks don’t pay dividends for the same reason that most startup companies anywhere don’t pay dividends: They’ve got plenty of extremely profitable places to invest every bit of internally generated cash. Other emerging market companies don’t pay dividends because nobody else does in their local stock market, or because it’s not in the culture, or, well, for countless reasons that have to do with what can be the ins and outs of convoluted ownership structures.

Still some emerging market companies do.

 Largely in the electric utility and telecommunications sectors. Even in emerging markets the shares of companies like these use dividends to attract investors because they’re in very capital intensive business and are constantly on the look out to raise new capital. Dividends are one way to make sure that they have a steady demand for new shares.

But sometimes in sectors and industries you wouldn’t expect. For example, I don’t know why China Nepstar Chain Drugstore (NPD), the largest retail drug store chain in China, has paid a hefty 5.63% dividend over the last year, but it did.

In the rest of this column I’m going to give you some caveats for dividend investors that are especially important to investing for yield in emerging markets and then I’m going to name four dividend plays—three for further research and one that I’m going to add to my Dividend Income Portfolio today. For some help in figuring out an asset allocation that includes these emerging market plays see my post “How to build a global portfolio ( )

First, a few caveats.

Cash flows from dividends in emerging market stocks can be very unevenly distributed during the year. So it pays to pay close attention to the ex-dividend date. You can wind up waiting a long time between payouts or discover that you just missed one of only two payouts during the year or the biggest of the year’s uneven payouts.

Look at the pattern at Brazilian electric utility Electrobras-Centrais Electricas Brasileiras (EBR), for example. In the last two years the company has paid out two sets of dividends. In 2009 on May 5, Electrobras paid out a cash dividend of 2.66 cents a share and a special cash dividend of 61.84 cents a share. So far in 2010 on February 1 the company paid out a cash dividend of $1.1947 and a special cash dividend of $1.329. I couldn’t tell you exactly how long you’d have to wait for the next payout or what it might be.

Remember that these are emerging markets and that the fortunes of a even what in a developed economy such as the United States or Japan would be a stodgy utility or telecommunications company can turn on a dime on a change in regulation or a shift in government that favors one player over another.

That’s exactly what overtook Turkcell Iletisim (TKC). The Turkish government introduced mobile phone number portability (so that users who switch carriers get to keep the same phone number) in November and that’s set off a war. Turkcell has been able to maintain its subscriber growth rate but increased churn (as customers switch providers) and deeper discounts to attract new customers cut average revenue per user by about 20% in the fourth quarter. I don’t think that endangers the stock’s current 4.8% yield but it could well keep a lid on any price appreciation in the shares.

And finally, learn as much as you can about who owns the company and the bulk of its shares. You’d like to see majority owners and investors whose interests are aligned with your own. It’s never easy for a minority owner—and unless you’ve got a whole lot more money to invest than I do that’s what you’ll be in any of these stocks—in an company, but beware companies where owners may have family strategic objectives that see cash flow from one family business as a source of capital for another or where influential domestic institutions have the ability to siphon off profits before they get to public shareholders. In many cases the best guarantee for minority shareholders is the reputation of a big international investor that owns a hunk of the stock.

Second, onward to three stocks to watch and one to buy.

Two emerging market telecommunications companies make this list.

First, Telekomunikasi Indonesia or Telkom Indonesia (TLK). Over the last two years the dividends have been delivered in twice-yearly distribution with the next due, I estimate, this spring. The dividend yield right now is 3.5%. This is by far the dominant telecommunications company in Indonesia with the majority of the company’s fixed line market and through its 65% owned subsidiary about 45% of the wireless market. Big outside investor Singapore Telecom gives minority investors decent assurance of fair treatment. Here you’re buying a piece of Indonesia, one of the best growth and fiscal responsibility stories in Asia. The economy is forecast to grow by 5.2% in 2010 after growing by 4.3% in 2009. The projected budget deficit for 2010 is just 1.6% of GDP. On February 8 Fitch Rating upgraded Indonesia’s sovereign debt to BB+ from BB. I’m adding this stock to the Dividend Income portfolio today. I’ll post a buy with more of my logic later today.

Second, Philippine Long Distance Telephone (PHI). The stock of the largest telecommunications company in the Philippines pays a dividend of roughly 6%. As the dominant fixed-line carrier, Philippine Long Distance faces a problem faced by all fixed-line companies around the world—that business is shrinking as wireless phones take a bigger share of the market. Fortunately, Philippine Long Distance owns more than half that market too. The company operates in a relatively small domestic market so investors aren’t looking at the kind of subscriber growth they’d get from an Indonesia, for example. But data services and broadband internet connections are just starting to take off in this market and the higher profit margins on those businesses will fuel Philippine Long Distance’s growth. In the last two years the dividend has been distributed in two payments; on trend the next distribution would be in March. Two outside investors, First Pacific (FPAFY), a Hong Kong-based investment company, and Nippon Telegraph and Telephone (NTT) own slightly less than half of the company. With this column I’m adding this stock to Jim’s Watch List .

And two Chinese growth companies that pay a hefty dividend make the list too. Neither are without risk—and not just because they trade on one of the world’s most volatile markets. Both these companies face strong competitors and are facing pressure on their profit margins. How attractive they are to you will depend on your take on how successful they’ll be in defending their turf.

China Nepstar Chain Drugstore (NPD). The largest retail drugstore chain in China has seen growth fueled by government initiatives to separate drug-prescribing in hospitals and clinics from drug-dispensing. Now it faces competition from the government’s effort to centralize distribution of the 300 most commonly prescribed drugs through the community health service. Margins in the drugstore business in China are even slighter than in the United States and so drugstore chains in China, like drug store chains here, try to bolster margins by selling private label products and adding services such as ATMs to draw traffic. The stock has a projected yield, based on the most recent dividend payment, of about 5.2%. Next distribution looks likely in April.

China Medical Technologies (CMED). This medical testing company faces competition not from China’s government but from the huge multinationals that dominate the medical testing business in much of the rest of the world. As China Medical has faced local competition on price that has cut into margins on its commodity tests, it has moved up the testing ladder into technologies such as semiautomatic enhanced immunoassay devices that let hospitals offer a wide variety of tests with limited staffs. But as the company moves up this ladder it will increasingly run into competitors such as General Electric (GE). That’s likely to slow the company’s growth but still leave operating margins near 30% for the medium term. The stock now yields roughly 4.2%. In recent years the dividend has been paid in a single installment in either July or September.

I’m going to add both these stocks to Jim’s Watch List with this column.

Full disclosure:  I own shares of China Medical Technology and Telkom Indonesia in my personal portfolio.