In their search for yield, investors should look to Asia. The region can indeed boast above-average dividend growth.
In the current context, many investors must reconsider their regional allocation in the equity markets. In particular, European dividend stocks are on the hot seat in the context of the war in Ukraine. In their search for yield, investors should look to Asia, writes George Gosden, manager of the Threadneedle (Lux) Asian Equity Income fund, in a recent market commentary. The region can indeed boast above-average dividend growth.
Dividends are growing twice as fast as inflation
According to Gosden, income-oriented investors focus on European and US equity markets to achieve their investment goals. At least two factors speak in favor of the Asian stock market: on the one hand, valuations there are low compared to other markets. On the other hand, dividend growth is significantly more dynamic in the region than in Europe or the United States. “Over the past 20 years, profits distributed by corporations have contributed about 40 percent of total return on equity. In a rising interest rate environment, the stability provided by dividend distributions can make the difference for equity investors. In Asia, the growth of dividends is higher than the rate of inflation”, explains the expert from Columbia Threadneedle.
Diversification of dividends paid
In the Asian market, dividend payouts are well diversified by country and sector, making them more sustainable over the long term. It is no coincidence, according to Gosden, that the percentage of Asian companies that distribute a portion of their profits at the end of each fiscal year is over 90 percent, which is much higher than in the rest of the world. . Of the stocks listed on Asian markets, more than 43 percent have a dividend yield of more than 3 percent. Many of these companies are located in high-growth sectors, such as the technology sector, which often generate very high revenues and profits.
The dividend yield as the only criterion is not enough
What is decisive in the selection of stocks is the individual examination of each stock. Gosden writes, “We look at cash flow stability, the existence of clear competitive advantages, and high barriers to market entry. Furthermore, the company’s business model must be supported by long-term structural trends.” Fundamentals could hold dividend policy surprises and the potential for additional alpha is often above average. “At the portfolio level, the focus should be on reliable dividend payers with a sustainable distribution policy, who are also able to increase the dividend.” In the Asia-Pacific region, the investment bank Macquarie or the semiconductor producer TSMC, for example, fell into the category of Quality Income securities. Samsung Electronics has also steadily increased its dividend payout over the past few years.
Volatility creates entry opportunities
Weaker growth in China and Hong Kong is also making companies more cautious about dividends. We are currently overweight Singapore companies due to the high proportion of financial stocks and REITs in that country. “Lately, we have been more focused on cheaper property developers that show potential for dividend growth through asset monetization. Tech stocks are also among our favourites. They often offer an attractive combination of dividend yield and growth,” explains Gosden. Overall, underlying cash flows in Asia-Pacific still look robust to him, despite market volatility. The number of high yield entry opportunities has increased due to market corrections.
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