Why income investing in emerging markets in 2026?

Today, emerging markets (EMs) also represent a broad and increasingly compelling income universe for active investors focused on total return.

We believe the combination of expanding dividend opportunities and structural growth potential makes this a compelling and often underappreciated opportunity.

Income investing is powerful in emerging markets

Income investing is often associated with mature markets. Yet, we believe the evidence suggests that EMs now offer a deeper and more established income landscape than many investors realize.

Dividend-paying companies have become the norm rather than the exception. Since 2010, the proportion of EM companies paying dividends – some 85% – has often exceeded that of companies in developed markets (DMs) (Chart 1).

This shift reflects improving corporate governance, stronger balance sheets and a growing recognition of the importance of shareholder returns. Just as important is the level of income available. More than half of EM companies offer a dividend yield above 3%, highlighting the relevance of income investing within the asset class (Chart 2).

Critically, these income streams are increasingly supported by structural drivers of growth. In technology, for example, many EM companies sit at the heart of global supply chains for semiconductors, connectivity, and memory. Rising demand linked to artificial intelligence (AI) and digitalization is helping to support both earnings growth and dividend capacity.

Isn’t income investing just telecommunications and utilities?

A common assumption is that income investing leads to a narrow set of opportunities concentrated in traditional defensive sectors. However, in EMs, this is not the case. Dividend opportunities span a wide range of sectors, including financials, materials, energy, and technology (Chart 3).

Infrastructure-related sectors provide a good illustration of this breadth. Demand for power, electrification and grid upgrades is rising, driven in part by digitalization and energy transition trends. Materials such as copper, alongside developments in energy supply chains, highlight the diversity of income opportunities beyond traditional high yield sectors.

The same is true geographically. There are meaningful income opportunities across a wide range of economies, from Asia and Latin America to the Middle East and Eastern Europe (Chart 4).

This breadth challenges the idea that income investing in EM is either narrow or defensive. Instead, it provides diversified income opportunities across sectors and regions.

Yield doesn’t preclude growth

Another misconception is that income investing comes at the expense of growth. In EMs, we believe the opposite is often true.

Dividends in EM have grown strongly over time, supported by improving fundamentals and economic expansion. Dividend growth has been significantly faster in EM than in developed markets since the early 2000s, equivalent to almost 12% compound annual growth over the past two decades (Chart 5).

This reflects both rising corporate earnings and an increase in payout ratios as companies mature.

Importantly, this growth is underpinned by long-term structural trends. Increasing investment in infrastructure, the expansion of digital technologies, and rising consumer demand are all contributing to stronger and more sustainable cash flows. As incomes rise and middle classes expand across EMs, leading domestic brands are benefiting from higher demand and improving profitability – creating a supportive backdrop for dividend growth.

In other words, income and growth are not mutually exclusive in EM. Instead, they are closely linked.

Total returns’ two components

Income has historically been an important contributor to total returns in EMs. Dividend returns in EM have been among the highest relative to other regions in the MSCI universe over the past two decades (Chart 6).

The compounding effect of dividend payments accounts for around half of investor returns. Meanwhile, the price return component is primarily driven by cash flow growth, which also fuels dividend growth.

While total returns are driven by a combination of price return and dividends, the key point is that we believe income has played a meaningful and consistent role over time. This reflects a virtuous cycle: strong economic growth supports earnings, which in turn supports dividend growth, reinforcing the income component of returns.

Why emerging markets now?

Despite ongoing geopolitical uncertainty, the long-term outlook for EMs remains intact.

The asset class appears to be in the early stages of an upcycle supported by a new global capital expenditure cycle. Structural shifts – including greater focus on energy security, supply-chain resilience, defense spending, and investment in AI – are driving increased investment globally. In our view, these trends align well with EMs’ strengths, both as producers of critical commodities and as key players in global supply chains and technology ecosystems.

Valuations are also supportive. The MSCI EM Index continues to trade at a 40% discount to the S&P 500, even after recent strong performance, while earnings expectations have been revised higher.^1,2 This combination of attractive valuations and improving earnings momentum may provide a favorable backdrop for active managers.