Perennially low interest rates in the UK coupled with a concentration of dividend paying companies have seen investors increasingly look for income beyond the usual UK-listed blue chips and bonds. With dividend levels rising across Asia, the income story here is certainly compelling. But over the short term, inflation and policy tightening remain worrying issues.
Rising dividends
Investors may not automatically associate Asian companies with high yields but . With increasing interest from overseas investors, many Asian companies have adopted a disciplined approach. Improving governance and management have led to falling debt levels, more stable cash flows and increased profitability, all making sustainable dividends more feasible.
The dramatic change in corporate culture means many companies in the region now boast dividend yields equivalent to, or even higher than, their European and US peers. In fact more than 80 per cent of Asian companies are paying out some form of dividend while the dividend yield for the Asian region overall is around 3 per cent.
Andrew Graham, manager of the Martin Currie Pacific Trust, points out that the developed Asia-Pacific markets of Australia, New Zealand, Singapore and Hong Kong account for 22 of the top 100 dividend-yielding stocks in the MSCI World index. "We derive a large proportion of our Asian exposure through developed-market holdings such as Singaporean bank UOB and Hong Kong-listed casino operator SJM Holdings. In developing Asia, Taiwan, Thailand and Malaysia stand out for their high relative dividend yields," he says.
Income diversification
Arguably the biggest attraction of Asian income lies in the added diversification benefit across countries and sectors. "Many investors sacrifice adequate diversification in order to achieve income, with their equity exposure heavily concentrated in the UK. As most UK equity income funds invest in the same underlying stocks this means that investors may be taking more risk than they realise," says Patrick Connolly of wealth managers AWD Chase de Vere.
Jesper Madsen, portfolio manager at Matthews International Capital Management, adds that investing in Asia's already large universe of dividend payers is a more diversified strategy than investing in a single economy like the UK or US, since you are investing in more than 12 different countries with various monetary and fiscal systems, not to mention at various stages of economic development.
Companies across the entire market capitalisation spectrum pay dividends which means investors have a more diversified range of companies to invest in when looking for dividend yield and growth.
While the broadening of income opportunities is good news for investors, in many respects it is still early days for equity income in Asia and some analysts caution that investors should tread carefully given that there isn't the long term history of companies paying dividends which there is in the UK.
"The equity dividend culture is really quite new and I think it is right to be cautious about the likely longevity of companies paying dividends in Asia," says Tim Cockerill of independent financial advisers Ashcourt Rown. "The focus on dividends came about because of the currency crisis in the late 1990s and the collapse in value of some businesses, investors realised that getting an 'instant' return ie a dividend was quite a good thing. And perhaps the financial crisis of 2008 has reinforced this view. But 'growth' is still a powerful lure."
Growth vs Income
Investors are often told to pick between dividends and growth - but Asia has delivered on both fronts: producing yield and delivering significant dividend growth.
Mr Madsen says: "Investors come to Asia mainly looking for growth, overlooking the fact that it can be achieved with an attractive level of income as well. A dividend-oriented strategy is still a growth strategy, but one focusing on growth in long-term core earnings. Over longer periods the earnings growth supports dividend growth. So for dividend-oriented investors Asia offers the combination of both attractive dividend yields (relative to other asset classes or equities globally) and dividend growth. So it is not one or the other."
However, investors question equity income investing in Asia, pointing to value traps where capital gains are muted and yields are the biggest contributor to returns.
Jason Pidock, manager of the Newton Asian Income Fund, doesn't agree. "We don't see this as being the case. Across the region, fundamentals continue to support companies' ability to pay dividends as well as offering growth, while companies' willingness to increases pay-out ratios is increasing as more and more realise the benefits of paying a dividend," he says.
He adds that the reason for Asia's current 'dividend sweetspot' is that the companies which dramatically cut their capital expenditure during the global financial crisis have kept this expenditure low. "We are reasonably confident about the sustainability of these dividends, as well as the prospects for dividend growth. Strong earnings growth alongside stable pay-out ratios means that continued dividend growth can be achieved."
The risks
Promises of income and steady growth might be alluring, but that does not mean Asia is a sure bet. Asian markets have flat lined for much of the last six months in part due to poor performance from global equity markets, but also because of issues such as inflation which has crept up across the region. Many governments are being forced to tackle the phenomenon by tightening monetary policy and raising interest rates.
However, most fund managers agree that much of the inflation seen so far has been as a result of food prices and the signs are that these pressures are starting to abate with a better harvest in China this summer and the easing of drought conditions in other parts of the region.
Mr Pidcock says Asia is better placed than developed markets to tolerate higher levels of inflation and inflation-induced policy, given the lower levels of leverage in consumers, corporates and governments alike. As wages are growing at higher than or equal to inflation levels, consumers are able to keep spending as their purchasing power is maintained. "Governments appear to be tolerating gradual appreciation of currencies, helping to calm inflationary pressures. Thus we have seen the recent tightening from China, India, Korea, Taiwan, Thailand and Indonesia digested reasonably well by their respective economies and markets," he adds.
Stuart Parks, head of Asian Equities at Invesco Perpetual, believes that while in the longer term, higher interest rates than in the past will return, these will not be so restrictive as to trigger a huge slowdown in growth.
As for income, an inflationary environment does mean that companies are arguably more likely to return cash to shareholders as the value of holding cash is eroded by higher prices. Mr Pidcock agrees: "Asia ex-Japan companies are more likely to return cash in the form of dividends rather than share buybacks."
