The 2010s were something of a treasure hunt for income. With a dearth of options available to investors – they searched high and low to lock in any sort of attractive yield. Alternatives, like infrastructure and renewables, became incredibly attractive, as did overseas players as a source of diversification.
But the world has definitely turned in the past year or so. Bond markets have returned to normal, and investors can now generate 5 per cent or more income by simply buying a gilt – while corporate bonds and high yield bonds are offering even greater yields, albeit with greater risk. Traditional UK Equity Income funds, with exposure to the likes of banks and oil majors, are also back in vogue.
Why go beyond these simple building blocks I hear you ask? Because history tells us that equity income portfolios need to be more than just a headline distribution yield (remember the damage swathing cuts courtesy of the pandemic did in 2020). Growth, diversification and the desire for capital gains cannot be overlooked at any cost.
Step forward Asian dividend-paying companies. Asia has historically 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 per cent of global dividends (double the amount offered in the UK)**.
Perhaps most surprising of all is that 70 per cent of Asia’s long-term equity returns have historically come from dividends – not growth***. I recently saw a chart from the Guinness Asian Equity Income team which showed the importance of reinvesting dividends in the region – with the performance return for those doing so rising from 220 per cent to 563 per cent between 2002 and 2022 (this is an increase in annualised returns from 5.9 to 9.8 per cent)****.
A changing landscape and the dividend health check
The role of dividend-paying companies in Asia has been evolving for some time, with governments across the continent looking to cultivate a better dividend-paying culture. Examples include the Shanghai Stock Exchange encouraging companies to pay more than 30 per cent 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.
This may sound obvious – but companies paying dividends is also a great sign of company strength in Asia – rather than the old view that “companies which have run out of growth opportunities pay dividends. Schroders says there is a common misconception that companies that pay high dividends in Asia are low growth. In reality, it is actually 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. Taiwanese chip foundry TSMC is an example of a firm which has continued to ensure its dividends profile matched its anticipated future profits.
Schroders says: “Unlike its peers who have used their capital expenditure needs as excuses not to pay their shareholders, TSMC largely ensured that its dividend payment profile was matching that of its anticipated future profits. As a result, the firm’s annual dividend payouts have largely moved in lockstep with its subsequent five-years earnings growth.”
Two other points I want to highlight are the diversity of income and the potential for dividend growth. While yields tend to be lower than the UK, there is a greater diversity of income-paying companies within Asia. Figures from Eastspring Investments show over 300 companies in the Asia-Pacific ex-Japan region paid dividend yields in excess of 3 per cent in 2022, well ahead of the next largest (Europe at 166)^. I’d also cite that around two-thirds of all dividends in the UK come from the top 15 companies (£17.8bn)^^ – this is not the case in Asia where the number of companies is significantly higher.
The other opportunity is growth, namely exposure to certain sectors which pay a dividend in Asia, unlike the developed world. abrdn Asian investment equities manager YooJeong Oh cites artificial intelligence as an example of an area of powerful growth where companies in the UK, Europe, or the US often won’t pay a dividend – by contrast, Asia will.
She says: “AI is only one of several compelling growth themes available in Asia. Another area of focus is on consumer aspiration – those companies benefiting from Asia’s growing middle classes and increasing wealth across the region.
“Green energy is another important theme across the region. Companies that have agreed to spend a percentage of their capex on renewable energy by building solar and wind farms as well as electric vehicle manufacturers generating a strong income from existing assets, which further powers its dividends.”
China still weighs heavily as do other internal and external concerns
Although China is typically an underweight in Asian dividend strategies – the market is dominated by large internet companies which do not pay dividends – the pressure within the property sector continues to weigh the market down.
Oh says: “Where investors are investing in China, they are careful to avoid any sign of fragility. They don’t invest in speculative developers or those with significant debt. This is where the greatest pressure has been felt. That said, poor sentiment can generate opportunities.”
Other countries such as India, Indonesia and Vietnam are taking advantage of this as companies diversify their supply chains away from China – so don’t expect China’s failings to limit growth too much.
Newton portfolio manager emerging markets and Asian equities, Zoe Khan, says the biggest risk to the Asian region is geopolitics, both from within and externally.
She says: “2024 is a big election cycle around the world. From an absolute risk perspective, the situation between China and Taiwan remains a key uncertainty. Given the potential repercussions of a conflict, however, it is in everyone’s interest to remain pragmatic. Investment strategies that limit exposure to China also run the risk of relative underperformance against the benchmark should policymakers in China implement some kind of ‘bazooka’ stimulus and its economy starts to thrive.”
History has taught us that diversification of income streams is a sensible move to ensure stability within portfolios. There is no reason why Asia cannot continue to offer an attractive alternative to traditional income strategies in the UK, while giving greater access to certain growth sectors and markets.
Funds to consider
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 currently has an attractive dividend yield of 4.9 per cent^^^.
*Source: Matthews Asia, February 2023
**Source: Janus Henderson Dividend Monitor Q3 2023
***Source: Schroders, February 2023
****Source: Guinness Asset Management, April 2023
^Source: Eastspring Investments, April 2022
^^Source: Computershare, Dividend Monitor Q3 2023
^^^Source: fund factsheet, 30 November 2023
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
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