Asian income stocks: where to find the continent's top money machines

International dividends shouldn’t only mean companies in the US or Europe – the Far East has plenty of big payouts to offer. Cris Sholto Heaton looks at some of the best choices for income from around the region

British investors traditionally treated Asia solely as a place to invest for growth. That attitude has firmly changed over the last few years, as the rising number of Asian income funds shows. Investment firms don’t launch products unless they see a market for them and years of low interest rates and shrinking bond yields have created an appetite for anything that pays a higher income.

However, unlike some of the fashionable income themes that are likely to backfire next time markets turn down, there’s a very solid case for Asian companies being part of a global income portfolio for the long term. Dividend payouts have grown strongly in the region since the global financial crisis: between 2009 and 2019 total dividends in Asia rose by 220%, compared with 120% in the rest of the world, according to figures from asset manager Janus Henderson. That’s partly due to earnings growth, but also due to companies returning a greater proportion of their earnings to shareholders.

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Average yields in the developed Asian markets of Singapore and Hong Kong – where many companies have long had a decent dividend culture – are very respectable by global standards, at 4.2% and 3%. The FTSE 100 still yields more at 4.4%, but if you want to diversify internationally, Asia offers more than other international markets such as the US (1.8%), France (3%) and Germany (3%) – not least because you can keep more of the dividend.

Many countries deduct withholding tax (WHT) from dividends before they are paid. This can vary from 15% in the Netherlands to 35% in Switzerland. (The UK is an exception and has no WHT, which is why British investors venturing abroad are often put off when after-tax payouts turn out to be less generous than expected.) You can sometimes reclaim some of this tax, but it’s a hassle. However, in Asia both Hong Kong and Singapore have no withholding tax: the yield you see is what you get (rates elsewhere in the region vary from nothing to 30%). That makes solid yields in these markets appealing, especially since these stocks are eligible to be held in a tax wrapper, such as an individual savings account (Isa). 

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Dividend income isn’t always stable

There is one important caveat about this Asian dividend growth story that British investors should keep in mind. Companies in markets such as the UK and the US tend to aim for steady dividends, ideally increasing each year and certainly never going into reverse. Managers tend to fear – quite often rightly – that their jobs might come under threat if they preside over too many dividend cuts.

By contrast, Asian companies are much more willing to vary their dividends in line with earnings – either by explicitly targeting a payout of a certain percentage of earnings, or by splitting the dividend into a lower regular dividend and a bigger special dividend, where the special dividend will be paid almost every year but may be dropped or trimmed if earnings are down or investment needs to go up. A run of good years – like the ones we’ve seen lately – can be followed by quite a big cut when the cycle turns. So you shouldn’t necessarily expect Asian dividends to be as consistent as those from some other markets.

That said, Western companies vary the amount of cash they return to shareholders as well – they just tend to do it through share buybacks, which can be more easily suspended without angering investors. Asian companies historically employ buybacks much less, which for income investors is a good thing since they usually find it more convenient if the dividend goes up instead of the share price. In fact, I’d argue dividends are better than buybacks for almost all investors in almost all circumstances, not because share buybacks are a terrible idea in principle, but because companies consistently tend to do buybacks when the market is booming (and their shares are pricey) instead of in the middle of a crash when their shares are cheap.

The other point to remember is that changes in exchange rates can make overseas dividends worth less (or more) in sterling terms. Those warnings aside, Asia offers not only growing dividends but also a good range of different opportunities. I’d broadly split them into five categories. Some of these you’d find in most markets around the world, but others are much more evident or interesting in specific Asian countries.

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