Asian portfolio managers who have eschewed the risky temptation of betting on emerging markets need an alternative source of income. High dividend stocks with firm growth prospects might be the answer.
In Asia, higher dividends have traditionally been found in Reits, financials, telecoms and IT stocks, according to Carl Berrisford, equity analyst, UBS CIO Wealth Management.
And currently, “the dividend yield is attractive in Asia because often it is higher than the local 10-year government bond yield. The growth aspect now becomes important too as growth is typically re-appraised upward ahead of an expected strengthening of the US economy,” he said.
Josh Crabb, head of Asian equities at Old Mutual Global Investors, identifies four key types of dividend stocks: defensive, growth, “surprise” payouts (for example by Taiwanese companies during the past decade and more recently by South Korean firms), and cyclical.
He points out that investors have already crowded into defensive dividend stocks, especially financial and property, reducing yields and hence fair value opportunities.
On the other hand, “cyclical stocks had reached low valuations and have been largely ignored by dividend seekers. But earnings and payouts should grow and offer strong potential, especially in Asia where cyclical stocks have been in a down-draft during the past six years.”
Crabb likes unpopular Chinese real estate stocks -- some are trading at half of book value and yielding about 7% -- and stressed bank shares; South Korean stocks with low gearing, high earnings and a commitment to large payouts; and also favours structural growth stories such as Vietnam and Pakistan (cheap valuations, low debt, high dividends) and India where power companies’ dividend yields are 3% to 4%.
Mark Matthews, head of Asia research at Bank Julius Baer, is keen on markets in Australian, Hong Kong, Singapore and Taiwan with forward dividend yields of at least 4%.
He points out that “companies with increasing dividends are more likely to weather a rising interest rate environment than stable but high yielding stocks, because they are able to grow dividend yield in tandem with rising rates.”
Furthermore, some sectors have potential to outperform regional indices.
“Empirical evidence suggest that dividend-yielding stocks with a growth angle deliver the highest returns in the long run,” argues Suresh Tantia, investment strategist for equities in Asia-Pacific at Credit Suisse.
In particular, information technology and healthcare stocks with structural growth profiles, high margin businesses and strong balance sheets can offer healthy dividend income accompanied by robust capital gain.
Of course, Asian investors need not confine their search for dividend yield within their home region.
Tuan Huynh, regional head of portfolio management in Asia-Pacific at Deutsche Bank Wealth Management, prefers higher yielding European to Asia ex-Japan dividend stocks because of the danger that slower economic growth in Asia will dampen corporate earnings.