June 2015
Schroders
Talking Point
Yielding sustainable dividends with Asian
stocks
King Fuei Lee, Fund Manager, Asia ex Japan Equities
Despite the many trends that are currently being propagated in the world of income investing, there remains an
asset class that possesses an impressive track record; dividends from Asian equities. One reason that not
many investors are focusing on the benefits of Asian dividend stocks is that the US Federal Reserve (Fed) is
now contemplating its first interest rate rise in nearly 10 years. Although generally perceived to be negative for
Asian stocks, as money flows back to the US, this masks a number of caveats.
The case for dividends
Firstly, even though most of the world’s major economies received a lot of monetary stimulus in the aftermath
of the Global Financial Crisis, the majority remain indebted and debt levels are even higher than they were in
2008. Secondly, a global trend that of muted inflation means that when rate rises are implemented, they will
only be done gradually.
In such an environment, the ability to seek out a growing but sustainable source of income becomes that much
more important. Fortunately the structural story supporting the case for investing in Asian dividend stocks
remains as strong as ever. Rising levels of urbanisation, industrialisation, positive demographics and
increasing levels of investment in infrastructure are all contributing to driving long-term economic growth in the
region. Furthermore, dividend returns, particularly in Asia, are highly correlated to the pace of growth and
actually account for three fifths of long-term returns in Asian stocks.
Seeking out yield
Identifying dividend stocks that have sustainable earnings, and thus ability, to pay out dividends is key to
ensuring a steady stream of income over time. Currently, a lot of the traditional high yield dividend stocks are
looking expensive. A long period of low interest rates saw them experience a sustained rally after 2008 as
investors sought out yield. Our approach is to look beyond a stock’s current yield (which may be oddly high
due to various factors such as a one-off special dividend or sudden ramp-up in payouts) and instead focus on
the future stream of dividends.
What this does is ensure that there is both sustainability and growth in the company’s dividend policy. As long
as these are present, the likelihood is that the stock will also be a strong long-term outperformer of the market.
Companies such as these we like to term ‘dividend growers’. And in a rising interest rate environment by the
Fed, which we will likely see in the second half of this year and beyond, these stocks have traditionally
performed well.
So where are the opportunities in Asia? Broadly speaking, higher corporate governance standards are a
harbinger of higher dividend payouts to shareholders as management looks to create value for its
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shareholders.
We are also finding dividend ideas in less traditional names, such as large Australian mining firms. Despite a
fall in commodity prices, the upshot is that a number of larger names are either reducing or keeping capital
expenditure levels steady. Their strong operating cash flows have allowed them to adopt progressive dividend
policies. Only the most viable projects are earmarked for investment and, in combination with debt reduction
and the spin-off of non-core assets, miners have been able to increase cash returns to shareholders.
Hong Kong property stocks, which possess a steady stream of profits from rental income (in many cases from
commercial properties) and appear relatively cheap, are also an area where dividend growth looks bright.
Another area that we are now favouring is Macau gaming companies. Share prices of casino operators have
come down to more reasonable levels over the past 12 months. Furthermore, the sector is also expected to
grow its dividends strongly over the next two years and many casinos’ diversification away from the VIP sector,
towards the higher-margin mass gaming segment, should help create a more sustainable business
environment in the gambling enclave.
A long-term plan
Investors must remember that companies that create real shareholder value will normally have a favourable,
and steadily growing, dividend policy. Companies that grow their dividends gradually, rather than ones that
have flat or erratic dividends, have consistently done better over the long term. In a world where interest rates
are still low, and with inflation rates on the cusp of deflation in many of the world’s developed economies,
investing in dividend stocks offers investors both long-term capital appreciation and a steady income stream.
Important Information
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