Darius McDermott: The lure of Asian dividends

It’s been a case of famine to feast for income investors in the past 12 months. Many UK equity income funds are now yielding more than 4% across the board, while bond yields have risen across advanced economies.

The UK 10-year gilt now stands at almost 3.5%, having more than doubled in the past year. With this risk-free rate, many investment grade bonds are now offering north of 5%, while high yield bonds are approaching high single-figure dividend yields.

The old saying, “Don’t look a gift horse in the mouth” comes to mind, but we must remember these figures are coming in what is very much a recessionary backdrop. Things can change quickly amid such economic uncertainty.

Asia ex-Japan accounts for roughly 13% of global dividends (double that from the UK)

To my mind, while the headline rates matter, diversification of income streams is just as an important consideration for investors.

From an equity standpoint, Asia is perhaps the standout in terms of finding this diversification. Historically, it has been a hotbed for investors looking for growth, with dividend returns often shrouded as a result.

But the reality is far different, with almost 10,000 dividend paying companies in Asia ex-Japan, accounting for roughly 13% of global dividends (double the amount offered in the UK).

Perhaps most surprising of all is that 70% of Asia’s long-term equity returns have historically come from dividends, not growth.

This has been a changing landscape for some time. There have been numerous attempts by various governments in Asia to cultivate a better environment for dividend payouts in the past decade.

Higher dividends go hand in hand with improved corporate governance

Examples include the Shanghai Stock Exchange encouraging companies to pay more than 30% of profits as dividends in 2013, Korea introducing a penalty tax on excess capital holdings to promote higher dividends in 2014 and the Securities and Exchange Board of India making dividend policies mandatory for the top 500 listed companies in 2016.

Higher dividends go hand in hand with improved corporate governance – as companies tend to have more stringent levels of stakeholder oversight when they go to the market.

As Schroders co-head of Asian equity alternative investments King Fuei Lee says, focusing on dividends has the added benefit of keeping investors away from potential disasters. This is because companies reduce the temptation to waste money on value-destroying investments when they return excess cash to shareholders.

Fuei Lee also says there is a common misconception that companies that pay high dividends in Asia are low growth.

He believes this is because corporate managers have better information about future prospects and are against dividend cuts. As a result, they often pay high dividends if they are confident about future earnings sustaining those payouts.

S&P sees China adding some $8.5bn in terms of dividend payments on top of its 2022 payout

He cites Taiwanese chip foundry TSMC as an example of a firm which has continued to ensure its dividends profile matched its anticipated future profits.

One point we must consider from a short-term perspective is the re-opening/relaxation of Covid rules in China.

The largest dividend payer in the region, estimates from S&P point to the mainland adding some $8.5bn (US dollars) in terms of dividend payments on top of its 2022 payout. The “Big Four” banks are increasing their annual payments, as are several state-owned energy businesses.

S&P says the outlook for 2023 is split between advanced and developing economies in the region – with Southeast Asian economies like Indonesia, Thailand and Malaysia expecting solid dividend growth, while Northeast Asian economies, such as South Korea, Taiwan and Australia will likely produce dividend payouts to 2022.

The risks are also clear. China tensions with the West are not going away, while you are also taking on significant currency risk. But, ultimately, you are getting access to a diverse range of companies and the potential for a rapidly growing income stream, particularly compared to the mature market – and narrow number of dividend paying companies – in the UK.

Asian dividends offer investors another alternative to diversify income streams

Income investors have been through a rollercoaster in the past decade or so. As a result, we’ve seen the rise of many asset classes, notably renewables and infrastructure, as alternative income streams in challenging times. There is no reason why the growing nature of Asian dividends cannot offer investors another alternative to diversify their income streams.

Those looking for exposure to Asian income funds may want to consider the Jupiter Asian Income fund, managed by Jason Pidcock, which targets large companies with reliable dividends that can deliver both income and growth for investors. The fund’s typically higher developed market holdings, notably in Australia, tends to make it a relatively defensive Asia Pacific option.

Others to consider include the Guinness Asian Equity Income fund, which invests in 36 companies, all of which have an equal weighting in the portfolio, or the Schroder Asian Income fund, which aims to generate a 3.5-4% yield. Those looking to dividends to enhance total returns could consider the Matthews Asia ex Japan Total Return Equity fund.

Darius McDermott is managing director at FundCalibre