- Which regions stand out for their big yields?
- We assess a handful of standout funds
The UK market has come a long way from the dividend cuts that marked the lockdown era, with income payouts continuing to roar back to life in 2022. However some caution may now be justified: Link Group’s latest report on the state of UK dividends warns that payouts could slow this year, in part due to a looming economic slowdown. Meanwhile, other common bugbears – such as the concentration of dividends among a few major UK companies – have not gone away.
Nonetheless, with Link expecting the UK to yield 3.7 per cent over 12 months, domestic shares certainly still merit consideration among income hunters. But it’s worth remembering that the income generation prospects can look pretty good in other major markets, too. Those seeking to diversify their equity income portfolio beyond the domestic market might wish to consider their options carefully.
Income plays challenging the UK
High dividend yields can often offer false promise – the estimated payouts may prove too great for a company to deliver, and the yield itself may just be a reflection of recent price falls for a particular stock or portfolio. But that doesn’t mean they should be entirely discounted, and a look at ex-UK income funds throws up some yields of note.
A region that continues to stand out, at least on this basis, is Asia. Henderson Far East Income (HFEL) is a portfolio we have flagged before on this front, and it now has a share price dividend yield of a little more than 8 per cent.
The trust has tended to benefit from some fairly cyclical exposures in recent history, and its biggest sector allocation at the end of 2022 was financials, although this is less of a pure play on the likes of banks than some might assume.
As the investment team noted in the trust’s last annual report: “We retain our exposure to financials, although are increasingly moving towards diversified financials rather than banks. Securities companies in China will take market share in high-margin wealth management away from the policy banks, while regional insurance remains a long-term structural growth story.” As such, the team has backed names including Citic Securities (HK:6030) and AIA Group (HK:1299), while a focus on banks in South Asia has led to them holding United Overseas Bank (SG:U11) in Singapore and Bank Mandiri (ID:BMRI) in Indonesia.
Janus Henderson Asian Dividend Income (GB00B6193536), an open-ended fund run by the same team, recently had an historic yield of 5.7 per cent, and other Asia vehicles also continue to stand out on the income front. Schroder Asian Income Maximiser (GB00BDD29F14) comes with an historic yield of 5 per cent, with Jupiter Asian Income (GB00BZ2YMT70) on 4.3 per cent.
It’s worth noting here that dividends are only one part of the total return puzzle. There’s rarely an exact inverse correlation between historic yield and historic performance, but in this case the lower yielders have both outperformed the two Henderson portfolios over one, three and five years.
Along with its financials position, the Henderson Far East Income team has also kept a good level of exposure to energy and materials companies, with a focus on fuels and materials that are “integral to the energy transition and are seeing existing and new areas of demand which are constrained by supply”. It’s also notable that the trust had a relatively modest exposure to China and Hong Kong at the end of last year – relative to the MSCI AC Asia ex Japan index weighting of 37 per cent, at least – although this allocation has tended to fluctuate in size.
The extent to which the Chinese reopening rally continues and the region’s shares recover is likely to be a big dividing line among Asian and emerging market funds in general in the months ahead. As the chart belownshows, some of the funds with higher yields differ notably in their exposure to China and Hong Kong.
For those who prefer to avoid the country, there are equity income portfolios available for those looking to focus on Asia and emerging markets without any exposure to China. Invesco Emerging Markets ex China (GB00BJ04JH43) recently came with a historic yield of around 5 per cent, and has made huge total returns in the past year. However, the fund does still retain some of the other regional concentrations that can be a feature of the sector. More than half of the portfolio was tied up in South Korea, Taiwan and India at the end of 2022, with the top two holdings, emerging market manager favourites Taiwan Semiconductor Manufacturing (TW:2330) and Samsung (KR:005930), making up around 16 per cent of assets. Its investment team nevertheless notes that it seeks companies trading at “substantially below” an estimate of fair value, with this value focus designed to take it into unloved areas of the market.
Turning to a more unconventional play on developing markets, BlackRock Frontiers (BRFI) has performed strongly in the past year and continues to offer something on the dividend front, with a recent yield of a little under 4 per cent. The portfolio has certainly been affected by the events of the past year: exposure to the Middle East has boosted performance, with the region benefiting from higher oil prices on the back of Russia’s invasion of Ukraine. However, the fund also suffered what it acknowledged as “outsized losses” in part due to its exposure to companies in Eastern Europe such as Hungarian bank OTP (HU:OTP). Frontier markets can be viewed as a diversifier to a broad emerging market allocation, but this is quite a niche portfolio with idiosyncratic risks.
Developed market options
A handful of funds in other regions have also boasted some tempting yields in recent times. The US, for one, has not traditionally been viewed as a high-yielding market, but a few names do tick some of the right boxes. Schroder US Equity Income Maximiser (GB00BYP25698) came with a trailing 12-month yield of more than 5 per cent at the end of last year, thanks in part to a focus on boosting its income by writing call options. As with some of the other funds mentioned, this portfolio comes with some of the concentration issues associated with its underlying market The fund had a 6.1 per cent weighting to Apple (US:AAPL) and 5.4 per cent in Microsoft (US:MSFT) at the end of December, presenting some duplication risk for those already using other funds with a US or global remit.
North American Income Trust (NAIT) recently came with a share price dividend yield of around 3.2 per cent – relatively attractive in its own right but also notable given the trust’s shares have risen considerably in the past year. The management team follows a value style of investing, and recently listed financials, healthcare and energy as their biggest sector allocations.
Other developed markets offer some interesting yields too: shares in CC Japan Income & Growth (CCJI) recently traded on a yield of around 3 per cent, as did shares in JPMorgan European Growth & Income (JEGI).
Following the recent successes of the FTSE 100 it could be worth considering the balance of investment styles in your portfolio. A focus on higher yields (and lower valuations) can lead many income investors into more cyclical sectors, and that comes with risks at a time when energy prices might be peaking and a recession looms.
