- A dividend-focused strategy to investing in Asian equities brings lower volatility, according to research from Schroders
- Schroders has found that 59% of total returns from Asian equities come from dividends returns, with 41% from price appreciation
- The Schroder Asian Equity Yield aims to invest in companies that offer higher expected dividend yields and sustainable dividend payments
- The fund aims to have a monthly distribution of at least 4% of the NAV per unit per annum
- On our platform, the dividend payments for the Schroder Asian Equity Yield are automatically reinvested
Many of us invest in Asian companies because we want to ride on the potential price appreciation. But Schroders’ Lee King Fuei has some interesting observations that offer new insights on the Asian investment opportunities: the majority of longer-term returns from investing in Asian companies are derived not from price appreciation, but from dividend payouts.
King Fuei is the Head of Asian Equities (Singapore) at Schroder Investment Management and he manages the Schroder Asian Equity Yield, one of five funds invested in Asia ex-Japan dividend-paying companies on our platform. He has been managing the Asian Equity Yield strategy since 2002.
The fund’s investment objective is to focus on companies that “offer higher expected dividend yields and sustainable dividend payments”. That essentially is the strategy of the Schroder Asian Equity Yield Fund.
King Fuei shared that he has found that there is “a positive relationship between dividend payout ratio and subsequent earnings growth in Asia”, debunking the perception that companies that pay dividends are in a slower growth phase.
Based on data spanning 14 years (as of end-November 2011), King Fuei notes that 59% of the total returns for Asian companies, came from dividend returns, with the remaining 41% coming from price appreciation (Chart 1).
Chart 1: Almost 60% of total returns come from dividends
King Fuei and his team also note that:
- Dividend-paying companies provide exposure to Asia’s growth but at lower volatility and less downside
- The number of dividend-paying stocks in Asia ex-Japan is growing, broadening the investment options
The Dividend Signaling Effect
A company that pays out dividends signals that it is experiencing much faster earnings growth, says King Fuei. “Our research has found that there exists a positive relationship between the payout ratio and subsequent earnings growth in Asia. Companies with high dividend payouts usually experience much faster subsequent earnings growth compared to companies with low dividend payouts.
He says this ‘dividend signaling effect’ occurs because "managers of companies have better information about their company’s future prospects and loathe cutting dividends as this is taken negatively by the markets.”
From his portfolio of stocks, he gives the example of Astra International, an Indonesian motorcycle distributor which “has steadily raised its dividend payout from nil to 45% over the last decade while growing its earnings by more than tenfold (Source: Factset, Schroders).”
The Best Dividend Opportunities in Asia
Asian economies are at different phase of development and while the more developed markets do offer “better dividend opportunities”, King Fuei also finds good potential in emerging Asia.
The more developed Asian markets, such as Singapore and Hong Kong, tend to offer better dividend opportunities and King Fuei explains why:
“This is because companies that have high payout ratios tend to be companies with good corporate standards as well. The disbursement of free cashflow as dividends helps to limit the potential for inefficient managerial investment or insider expropriation, as agency costs are alleviated and the interests of managers and shareholders are aligned.”
Superior emerging opportunities within the emerging economies of Asia can also be found.
“The potential to find an increasing number of good dividend opportunities in these countries is huge, with improving corporate governance there. Countries such as China and India also have much scope to grow their dividend payout ratios moving forward from the current levels of 30%* and 21%* to the Asian average of 43%* (*source: Factset, last 12M dividend payout ratios of MSCI China, MSCI India & MSCI AC Pacific ex Japan indices as at 31 Jan 2012). The growth of the dividend payments in these 2 countries will also be underpinned by their massive underlying economic growth potential,” says King Fuei.
The number of companies in Asia which are paying out dividends is increasing. King Fuei notes that the number has grown from 58% in 1998 to 81% in 2010 (source: CLSA Asia-Pacific markets). The global financial crisis did have an impact but he notes that payout ratios are on the rise because corporate restructurings following the Asian financial crisis have led to “corporate profitability, burgeoning cash flows and low debt levels which eventually gave way to the higher dividend payouts today”.
Three types of dividend stocks
King Fuei divides his investments into three baskets: Dividend Cows, Dividend Growers and Dividend Surprises. “All three baskets of stocks share the common characteristic of a growing dividend stream, but are separated by the differences in the drivers behind the dividend increase as well as the magnitude and pace of the dividend increase,” he says.
Here, he explains more on the differences between the three categories:
- “Dividend Cows represent the group of stocks which provide a steady dividend stream secured on a steady earnings profile. The companies tend to grow at above-nominal GDP growth rates and boast of high payout ratios secured on steady revenues/earnings streams that support the high dividend streams going into future. They are also more value-oriented and typically consist of Utility and Consumer Staple stocks.”
- “Dividend Growers and Dividend Surprises differ from Dividend Cows, with the former two groups of stocks exhibiting dividend streams which increase at a faster pace than that of Dividend Cows.
The differentiation between Dividend Growers and Dividend Surprises lies in the inherent driver behind the dividend increase. If one considers dividends as a function of the payout ratio multiplied by earnings, the increasing dividend stream of Dividend Growers tends to be driven by the growth in earnings. These companies tend to be growing relative to the market by increasing market share or margin expansion, and display more growth-like characteristics.
The increasing dividend stream of Dividend Surprises, on the other hand, is driven by an increase in the payout ratio which is greater than market expectations. These stocks are usually represented by companies which exercise better capital management, and include companies undergoing buybacks.”
Difficult environment but Asia is looking good
King Fuei expects a “difficult market environment in the near term”, which will lead to higher volatility, as concerns “over a recession in Europe, an uncertain US economic outlook and slowing growth in China” remain.
Nevertheless, growth in Asia is expected to remain “relatively resilient”, “with the Asian economic growth model shifting over the last decade from an export oriented one to a more consumption driven one. Furthermore, Asian central banks have sufficient monetary and policy levers to support growth - monetary policy remains tight in most countries, while some Asian countries also have the added advantage of healthy debt levels and adequate fiscal room to respond.”
"Over the longer term, we expect Asian companies and stock markets to be supported by the positive structural trends of urbanisation, industrialisation and demographics as they continue to unfold in Asia. With the increasing urbanisation of Asia and the increasing percentage of the Asian population moving from rural areas into the cities, consumption levels are expected to rise and underpin economic growth. Also, as the younger population in Asia moves into the working age group bracket and enters the workforce, the increased productivity levels that result would also drive higher economic growth.”
Launched in January 2005, Schroder Asian Equity Yield Fund aims to generate a monthly distribution of at least 4% of the NAV per unit per annum. Please note that the dividends from Schroder Asian Equity Yield are automatically reinvested (and not paid out) at Fundsupermart.com. As of end-March 2012, Hong Kong, Australia and Singapore made up 62% of the fund’s geographical asset allocation.
The Schroder Asian Income, a balanced fund invested in both Asian equities and bonds, offers a monthly payout. Read more about the fund here:
Idea of the Week: A Fund which Can Profit from Yields in Asian Equities and Bonds [5 Apr]
Catch Yap Sze Sze, Product Manager of Asia ex-Japan Equities, Schroder Investment Management, as she shares more about Schroder Asian Equity Yield Fund with us:
Ask The Experts: Balancing Act Between "Dividend Cows" and "Dividend Growers"
The other funds invested in Asian equity with a focus on dividends are:
Eastspring Inv Asian Eq Inc SGD ASDQ
First State Dividend Advantage
Fidelity AP Div A-SGD
Henderson Hzn Asian Div Inc-A2 SGD
Ask The Experts: Balancing Act Between "Dividend Cows" and "Dividend Growers"
Idea of the Week: Choosing the Right Asia Fund for Your Portfolio - Part 2 [2 March 2012]