April 2016
Schroders
Talking Point
Asia’s ageing population drives demand for
dividends
King Fuei Lee, Head of Asia Equities
Of the “four Ds” impacting companies in Asia, we think it is demographics which creates opportunities
for dividend investors.
Global stock markets have been rocked by short-term volatility triggered by falling commodity prices and the
start of the US Federal Reserve’s hiking cycle. Despite the more dovish comments, the Federal Open Market
Committee remains in hiking mode, with its expectation for two rate increases this year exceeding market
pricing of one or less. However, from a longer-term perspective, our views on Asian stocks haven’t changed.
We have maintained for a while that companies in the region will be impacted by the “four Ds”:
 Demographics
 Deflation
 Disruption
 Deleveraging.
It is in the realm of demographics where we believe opportunities for dividend investors can be found.
Ageing demand for high yield
Investing in dividend-yielding stocks in a low-yield environment has become almost de rigueur for investors in
search of returns in the current environment. The conventional wisdom is that investors all over the world are
seeking more lucrative alternatives to the low (or near-zero) interest rates that are being offered on bank
deposits. What is perhaps less well-understood is that a high dividend-yielding strategy is often also the
preferred choice for an ageing population.
Behavioural economics
Although economics is often referred to as the “dismal science” for its inflexibility to relate to real-life human
behaviour, the area of behavioural economics has shed light on a multitude of issues and has often been at the
forefront of the most insightful observations about investor habits.
According to the behavioural life-cycle theory, an individual mentally breaks down their wealth into three
components:
 Current income
 Current assets
SchrodersTalking Point
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 Future income
At the individual level, the temptation to spend is always greatest for current income, and least for future
income. This is especially the case as people age and start to retire: they have a tendency to consume out of
dividends received (or current income) rather than from capital gains (or future income). As a result, these
investors generally favour high dividend-paying stocks over those that pay lower dividends, which in turn has
led to outperformance from the former.
And this is exactly what I discovered in a paper I published two years ago. I found a strong positive relationship
between the long-term returns of dividend-yielding strategies in the US and the change in the proportion of
older investors. Effectively, the larger the increase in the proportion of older people in the general population,
the greater the relative demand for high dividend paying assets.
What does this mean for Asia?
Although most of the study was focused on the US, unsurprisingly the same kind of relationship is seen in most
other international markets, including those in the Asia Pacific region. It is particularly pertinent for countries
such as Australia, Hong Kong and Singapore – the traditional bastions of Asian dividend-paying stocks.
Commentators often follow the market adage that dividend-yielding strategies are the “low-hanging fruit” in
creating alpha and that its time has passed as investors look elsewhere.
However, for long-term investors ruminating about what to buy in a deflationary world, where rock-bottom
interest rates and ageing demographics are the norm, high dividend yielding stocks are looking as ripe as ever
for the picking.
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