Asia leads the world for income

"You may not automatically associate Asian companies with high yields; however, the trend has been evolving for over a decade," says Caroline Keen, alternate manager of the Newton Asian Income Fund. "Firstly, fundamentals continue to support companies' ability to pay, and, secondly, willingness to increase payout ratios is increasing as more and more companies realise the benefits of paying a dividend. There is a growing universe for us to choose from."

Geographical split of FTSE World stocks yielding greater than 3 per cent

Source: Factset, Datastream, January 2012/BNY Mellon

Traditionally, UK investors have turned to UK equity income shares and funds, but bank dividends drying up during the financial crisis and BP's suspension of its dividend for a while highlighted the fact that UK dividends come from a limited range of sources, and when one fails it can have a major impact. As a result, UK income-seekers are increasingly looking overseas.

Average Asian yields are not as high as in Europe or the UK, but are higher than the US, Japanese and global average, according to Juliet Schooling Latter, head of research at broker Chelsea Financial Services. About a third of all the stocks in the world that yield over 4 per cent are in Asia.

"We are also reasonably confident about the sustainability of these dividends, and the prospects for dividend growth," adds Ms Keen. "Strong earnings growth in Asia alongside stable payout ratios mean that continued dividend growth can be achieved. Not only are managements encouraged to be disciplined in their allocation of capital, but dividends can also be used to highlight value. We are also looking for companies that can grow their dividends, and over the life of our fund, roughly 50 per cent of total return has come from income and 50 per cent from capital appreciation. Asia offers opportunities for both income and growth."

About a third of returns from Asia in the last decade have come from dividends and Asian equity income funds allow you to benefit from both superior Asian growth as well as income. In Asia, 50 per cent of yield comes from 35 companies in contrast to the UK where 50 per cent of yield comes from less than 10 companies. And, as a result of the Asian crisis, companies in Asia have cleaned up their balance sheets considerably and those that pay a dividend tend to have better corporate governance.

"Asian equity income funds are a lower risk way of investing in the region and they give you decent diversification in your income portfolio - they invest in both developed and emerging Asia and with that you get diversification of currencies as well as stocks," says Ms Schooling.

Countries such as Australia and Singapore feature prominently in Asian equity income funds' portfolios, so in theory they are not as risky as some growth-orientated Asia ex Japan funds which are more focused on developing markets.

It is not just Asia fund managers who like equity income from this region - global income funds invest there, for example IC Top 100 Fund Murray International (MYI) has more than 28 per cent of its assets there.

Asian equity income funds help to diversify away from UK equity income and can help your portfolio keep pace with inflation. They are good for people in retirement who need an income but also growth, as they will be retired for a number of years, according to Ms Schooling. They could also be used in a junior individual savings account (Jisa) for exposure to Asia over a number of years.

Growth investors could hold them and reinvest the dividends, as over the long term dividends have made up a significant proportion of the overall return on equities.

Concerns

But Asian companies are not immune to problems in Europe, a slowing China or US economic concerns, so will also be subject to volatility, although income-producing shares outperformed against those that didn't produce one over the last year.

"Equity income funds as a style of investing have done well across all regional markets due to the demand for solid, dependable income-paying stocks in the current challenging stock market environment," says Rob Pemberton, investment director at HFM Columbus Asset Management. "Thus Asian and US Equity income funds have found themselves towards the top of the three-year performance tables for these regions and one must be careful of jumping onto a bandwagon just as it is about to stall: investors are moving out of expensive equity income companies such as healthcare and consumer staples into more growth-oriented and cyclical companies which offer better value."

This means in a rally Asian equity income funds could underperform growth-orientated Asian funds. Conversely, as Asian income funds are less volatile due to their holdings in more defensive areas such as telecoms, if Chinese growth slows considerably or global growth deteriorates further, Asian income strategies should outperform, says Ms Keen.

Regional funds are less diversified than global funds in theory making them riskier, and Asian equity income funds usually include some exposure to riskier emerging economies.

"Rather than making a regional bet, I prefer global equity income funds as they have greater diversification and give the manger more scope to add value through regional asset allocation as well as stock selection," says Mr Pemberton. His preferred global income funds are Newton Global Higher Income (ISIN: GB00B0MY6T00) - also an IC Top 100 Fund - M&G Global Dividend (ISIN: GB00B39R2M86) and Lazard Global Equity Income (ISIN: GB00B24DPY79).

But Ms Schooling thinks that if you have a large enough portfolio you could hold both global and Asian equity income funds.

Read about other areas for overseas equity income