In the current situation, many investors are having to rethink their regional equity allocation. European dividend stocks in particular are being put to the test once morest the background of the war in Ukraine. Investors should turn their gaze to Asia in their search for yield, writes George Gosden, portfolio manager of Threadneedle (Lux) Asian Equity Income, in a recent market commentary. Because the region can score with above-average dividend growth.
Dividends grow twice as fast as inflation
According to Gosden, income investors focus on the European and US equity markets when implementing their investment goals. At least two factors speak in favor of the Asian stock market: First, valuations there are cheap compared to other markets. On the other hand, dividend growth in the region is significantly more dynamic than in Europe or the USA. “Over the last twenty years, corporate profit distributions have contributed around 40 percent to total return on assets. In an environment where interest rates are rising, stability through dividend payouts can make all the difference for stock investors. In Asia, dividend growth is ahead of inflation,” explains Columbia Threadneedle’s researcher.
Diversification of dividend payments
In the Asian market, dividend payouts are well diversified by country and sector, making them more sustainable over the long term. It’s no coincidence, Gosden says, that the percentage of Asian companies that distribute a portion of their earnings at the end of each fiscal year is over 90 percent, significantly higher than the rest of the world. Of the stocks listed on Asian markets, over 43 percent a dividend yield of more than 3 percent. Many of these companies are in high-growth sectors such as technology, which often generate very high revenues and profits.
Dividend yield as the only criterion is not enough
The individual consideration of the shares is decisive for the selection of the title. Gosden writes: “We look at how stable the cash flows are, whether there are clear competitive advantages and high barriers to market entry. In addition, the company’s business model should be supported by long-term structural trends.” Fundamentals can surprise dividend policy and the potential for additional alpha is often higher than average. “At the portfolio level, the focus should be on reliable dividend payers with sustainable payout policies who are also able to grow the dividend.” In Asia-Pacific, for example, investment bank Macquarie or semiconductor manufacturer TSMC fell into the quality income category -Title. Samsung Electronics has also regularly increased its dividend payout in recent years.
Volatility creates entry opportunities
Weakening growth in China and Hong Kong is also making companies more cautious regarding dividends. Companies from Singapore are currently overweight due to the high proportion of financial stocks and REITs there. “Recently we have increased our focus on lower cost real estate developers with potential for dividend growth through asset monetization. Technology stocks are also among our favourites. They often offer an interesting combination of dividend yield and growth,” Gosden explains. Overall, he sees underlying cash flows in Asia Pacific as still robust despite market volatility. The number of high-yield entry opportunities has increased due to the market corrections.
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