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The search for yield is driving investors toward stocks that pay dividends—and some of the most generous yields are in Asia, where stock prices are among the world's cheapest. While most international dividend mutual funds are heavily allocated to North America and Europe, few have major exposure to Asia. The main reason for that is U.S. investors tend to associate Asian companies with torrid growth and believe that profits are being reinvested in their businesses at the expense of dividends, much like at U.S. technology giants Apple (AAPL) and Google (GOOG).
But that conventional wisdom is not completely accurate, some portfolio managers say.
"If you look at history, Asia has been yielding over the years 75 to 100 basis points higher than the U.S. So this is nothing new," says Jesper Madsen, lead manager of the $2.3 billion Matthews Asia Dividend Fund (MAPIX) in San Francisco. "It seems like the marketplace is not fully appreciating the fact that Asia does offer the yield and that it also comes with a higher growth rate alongside."
It makes sense that high growth rates in Asian countries' gross domestic product and capital flows into the region would show up in dividend growth rates for the region overall, Madsen says. In an analysis done in the fall of 2010, Madsen says, he found that the aggregate dividend for the MSCI Asia Pacific Index rose at an average annual rate of 16 percent from 2002 to 2009, compared with a 6 percent dividend growth rate for the Standard & Poor's 500-stock index. Bloomberg data for the same period show that growth in Asian dividends outpaced U.S. and European dividends on an annual basis, albeit not quite as dramatically. (The Matthews study froze the indexes at their compositions as of Dec. 31, 2002, to avoid overstating dividend growth that would have resulted from including many high dividend-paying Asian companies whose initial public offerings occurred after 2002.)
Growth and Yield
Dividend growth on the MSCI Asia Pacific Index increased at a compound annual rate of 7.23 percent, vs. 4.85 percent for the S&P 500 and 4.83 percent for the MSCI EAFE Index, which includes companies across Europe, Africa, and the Middle East, according to Bloomberg data. "That goes counter to people's basic understanding of what investing is about," Madsen says. "They've been taught if you want growth, you have to sacrifice yield. But we've seen companies [in Asia] deliver both."
Indeed, the dividends paid by the 1,022 companies in the MSCI Asia Pacific Index totaled about $200 billion in 2010, on par with S&P 500 companies, Madsen says. S&P says the 500 companies in its index paid $205.3 billion in dividends last year. "It talks to the fact that this is a market that's already there," Madsen says. "It's present, available to be tapped."
Another psychological hump for investors to surmount is the belief that Asian companies carry greater risk, whether due to lower trading liquidity than well-established Western companies, less transparent corporate governance, or the uncertain treatment of minority shareholders. James Weir, co-manager of the Guinness Atkinson Asia Pacific Dividend Fund (GAADX), thinks those risks are overstated. Investors have more cause to worry about corporate and government balance sheets in Europe than in Asia, where debt levels have been managed tightly since the currency crisis of the late 1990s, he says. Weir believes a well-capitalized telecom provider in Malaysia, for example, is a better pick for investors than one in the United Kingdom based on a cheaper valuation, better earnings growth, and a higher dividend yield, typically in the high single to low double digits.
To be sure, investors must be aware of the impact of currency exchange rates, which can cause future dividends to fluctuate dramatically. Although Asia lacks Europe's unified currency and certain country currencies such as the Indonesian rupiah took big hits during the Asian currency crisis in the '90s, large capital inflows into Asian countries have put pressure on many Asian currencies to appreciate, boosting total returns for investors, says Weir, who works in London. Investors will also owe taxes on American Depositary Receipts they own, but those can be recouped by filing for a foreign tax credit when they file their taxes, according to The Little Book of Big Dividends by financial adviser Charles B. Carlson, editor of DRIP Investor, a dividend-focused magazine. Investors must also consider the risks of inflationary monetary policy, which lowers the value of the local currency in which a dividend is paid, the effect of commodity price swings in countries that depend on commodities, and political risk, Carlson cautions.
Dan Peris, co-manager of the Federated International Strategic Value Dividend Fund (IVFAX) and author of The Strategic Dividend Investor, a book published in March, says he doesn't see many publicly traded companies in Asia that are mature enough to be able to pay out a large percentage of their earnings as dividends. He considers telecom providers a notable exception and says companies in Singapore, Hong Kong, and Taiwan are better able to pay bigger dividends because of the mature, well-regulated markets in which they operate.
Getting Western investors to lower their resistance to Asian stocks in general comes down to helping them see the true significance of the shift occurring in economic growth drivers, says David Nadel, co-manager of the Royce Global Dividend Value Service Fund (RGVDX), which launched in December. "Your average investor just views emerging markets and globalization as the flavor of the month. We think this is the flavor of the decade or more," he says. "This notion of emerging-market consumption driving the global economy and essentially displacing U.S. consumption—I think that's the single most important investment theme of the next decade."
Right now, companies in Europe offer the highest average yield—3.3 percent as of Apr. 29—compared with 1.8 percent for the U.S. and 2.4 percent for Asia Pacific (2.7 percent when Japan is excluded), according to MSCI. Over the five years ended Apr. 29, Europe's yield has averaged 3.55 percent, vs. 2.07 percent for the U.S. and 2.36 percent for Asia Pacific (3.02 percent excluding Japan).
The one-year yield outlook is better for Asian dividends, too. The projected 12-month dividend yield for the MSCI Asia Pacific Index is 2.61 percent, higher than the 2.05 percent forecast for the S&P 500, but less compelling than the 3.46 percent for the MSCI EAFE, according to Bloomberg data as of May 13. The three-year projected growth rates for the S&P 500 and the EAFE indices—9.51 percent and 10 percent, respectively—are far above 5.01 percent for the Asia Pacific Index, however.
Trends in corporate profits in Asia also bode well for future dividend growth. "We think Asia, broadly speaking, is going to grow its earnings at a higher rate than the S&P 500 index," says Weir at Guinness Atkinson. "And if [companies there] are paying dividends as a percentage of net income, it makes sense for dividend yields to be growing faster in Asia."
Nadel says the new Royce dividend fund isn't having trouble finding Asian companies with attractive dividend yields. About one-third of its assets are invested in Asian stocks, slightly less than a 35 percent allocation to Europe and more than triple a 10 percent weight in North America. Still, Nadel says he understands investor concerns about the region. He admits he'd prefer to get exposure to Asia through a European company with 200 years of operating history whose growth in recent years has come mostly from selling into the region than through a local company. "Japan is a great example of a developed market whose companies are increasingly a play on … emerging Asia," he says.
Weir believes Asian companies are poised to deliver further dividend growth over the next few years due to three major trends: ongoing earnings growth, currency appreciation against the U.S. dollar, and maturing companies whose managers increasingly understand the benefits of paying out dividends. All of that, Weir says, can generate returns and dividend growth "which you don't really get elsewhere."
Bob Huber and John Fisher at Bloomberg Applications contributed compounded annual dividend growth rate calculations by region.