This article was first published in MoneyWeek magazine issue no 985 on 7 February 2020. To make sure you don't miss out in future and get to read our articles as they're published, sign up to MoneyWeek here and get your first six issues free.
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).
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.
Reaching for the riskiest yields
The first and most obvious are stocks that trade on high yields because they are out of favour. Often they’re in distress, or at least they don’t seem to be going anywhere. This is often the most dangerous area of income investing because typically the yields won’t be sustainable and often they’ll be cut much more than you expect. Consequently it’s more interesting to value investors hoping for a recovery than those who want a stable income – and that means these are not really what we are looking for if we want to add some Asian stocks to an income portfolio.
These are typically one-off special situations, but there is one obvious area where it applies broadly right now: Hong Kong retailers, many of which have traditionally paid fairly decent dividends and whose shares have been battered first by the protests and upheaval in the city that started in March last year and more recently by the risk that the China coronavirus outbreak will spread to the city. A couple of these, such as clothing retailer Giordano, have long been smaller holdings in some of the Asian income funds; it now notionally yields about 13.5%, but obviously that yield will not be sustained in the short term, although it is more diversified than many of its peers (over half its revenue comes from outside Hong Kong). I hold it, but cannot recommend buying it now in these circumstances. However, it may be one to keep on your watchlist as a potential value opportunity if the twin crises start to pass.
A unique real-estate market
The second group are investments designed to pay out practically all their income to investors, most obviously real estate investment trusts (Reits), but also trusts that own other types of business assets. Asia’s most interesting Reit market is Singapore, which has a large and diverse range of Reits covering offices, retail, industrial, hospitality (for example, hotels) and other more specialist niches. Some of these Reits are backed by entirely private companies; others by government-linked companies (GLCs, firms set up decades ago by the Singaporean government to develop the local economy that still have the government as a major investor).
Under normal circumstances, I tend to see the GLC-backed Reits as the most interesting because of what they can add to a portfolio that you don’t get elsewhere. They own some of the best assets in Singapore and enjoy access to relatively low-cost financing because of their status, helping them to fund other acquisitions in Singapore and abroad. You’re not going to get huge increases in dividends from these. You’re aiming for a fairly solid income that should rise faster than inflation over the medium term. Yields have fallen over the last few years, but are still respectable compared with other options. Examples I hold include Ascendas Reit (industrial) on 5%, CapitaLand Mall Trust (retail) on 4.7% and CapitaLand Commercial Trust (offices) on 4.3%. The last two are merging to form Asia’s third-largest Reit.
Best of the blue chips
Thirdly, there are the blue-chip equities that pay a respectable yield and will hopefully grow above inflation over time. Some developed markets in Asia have a good number of blue-chip companies whose names won’t be familiar to most British investors but are long established and deemed very solid. These tend to be the cornerstone of most Asian income funds. The three Singaporean banks – DBS, OCBC and UOB, on 4.7%, 4.4% and 4% respectively – are popular choices; in Hong Kong there is obviously the more familiar HSBC (7%), but also BOC Hong Kong (5.6%).
Clearly, banking dividends tend to be more vulnerable to cuts in a downturn; telecoms can be more stable. Options here include Singapore Telecommunications (5.3%), Hong Kong’s HKT Trust & HKT (5.8%) and Hong Kong-listed China Mobile (4.6%). I’d also put the various parts of the Hong Kong conglomerates such as Swire (4.6%) and Jardine Matheson (3%), with their diverse range of regional businesses, in this group.
You’ll also find that almost all the Asian income funds have quite a bit of their portfolio in Australia so that they can hold the Australian banks and even the resources firms. One look at the yields these offer at present and you’ll understand why: National Australia Bank (9.3%), Westpac (10%), Commonwealth Bank of Australia (7.3%), and Australia and New Zealand Banking Group (8.5%). Unsurprisingly, this reflects some scepticism about what these firms will be able to pay in the future. Australia has a very long housing boom, raising questions about what may happen to bad debts when the cycle turns (when it eventually does – prices wobbled a couple of years ago, but seem to be turning up again). And an inquiry into the financial services sector has already forced banks to pay billions in compensation and penalties, and is likely to bring changes that may dent profitability in future. Personally, I wouldn’t touch this sector, at least until a real recession has rampaged through the Australian economy and shares are more evidently at rock bottom; you may be bolder than me.
Hunting for higher growth
Fourth on my list are stocks that offer more dividend growth. The most notable feature of this group in Asia is the presence of the tech sector. While paying a dividend is often viewed as an admission in Western markets that a tech firm’s fastest growth is behind it, that’s not the case in Asia. Even China’s Tencent (0.3%) pays a tiny but growing dividend. More significantly for income seekers, two of the biggest holdings in most Asian income funds – in many cases, the two largest – are Taiwan Semiconductor Manufacturing, the world’s biggest independent computer chipmaker, and Samsung Electronics, which makes devices such as smartphones, tablets and TVs, as well as components and chips. They pay 2.9% and 2.4% respectively.
These yields aren’t spectacular, but growth has been: Taiwan Semiconductor Manufacturing has raised its payout by an average of almost 25% per year over the past five years and Samsung Electronics by almost 29%. Both are world-leading firms; my only caveat with stocks like these is that they operate in relatively cyclical industries and so earnings and hence yields may be vulnerable in the next recession. As with any sector, don’t rely on tech for too much of your income.
Rising payouts in Japan and Korea
Samsung takes us neatly into the fifth and final category: companies that are seeing a structural change in their attitude to shareholders and dividends, and beginning to pay out a lot more. The key markets here are Korea and Japan, where companies that traditionally viewed shareholders’ pleas for income with bemused contempt are finally starting to lift dividends, as well as embark on other improvements to corporate governance (although income investors could do without Japan’s growing enthusiasm for share buybacks under pressure from activist investors).
This may now be a reasonably familiar story to many MoneyWeek readers, but one potentially interesting niche within it is Korean preference shares. Unlike preference shares in some markets, these receive exactly the same dividends as the company’s ordinary shares, but don’t have voting rights. Since most of these firms have a controlling shareholder, lack of voting rights doesn’t really matter, but these preference shares can still trade at substantial discounts to the ordinary shares owing to their lower liquidity and greater obscurity. They may not offer especially high yields now, but the combination of growing dividends and the potential for the discount to close if governance continues to get better could prove a powerful combination. That’s why you’ll sometimes see Korean preference shares pop up as a small holding in some of the Asian income funds that we look at below.
Funds to play the income theme
There are four investment trusts in the Association of Investment Companies’ Asia Pacific Income sector. Aberdeen Asian Income (LSE: AAIF), Henderson Far East Income (LSE: HFEL), JP Morgan Asian (LSE: JAI) and Schroder Oriental Income (LSE: SOI). Only Aberdeen Asian Income trades on a meaningful discount to net asset value (NAV) at present (7.5%); the others are around zero – or even a modest premium in the case of Henderson Far East Income, probably because its 6.5% yield looks so tempting compared with the 4% or so yields that the others offer.
Aberdeen Asian Income has the weakest performance in recent years, but I’d expect it to be more defensive if markets turn down. The stocks in its portfolio appear to be higher-quality, more stable names than in the Henderson or JP Morgan funds, which in my view are targeting slightly riskier yields or more aggressive share-price growth. Given that it is also on the largest discount, it would be my preferred choice of the four at present. The ongoing charge last year was 1.11%.
If you prefer open-end funds, major options include Schroders Asian Income (run by a different manager to the trust), BNY Mellon Asian Income and Jupiter Asian Income, all offering yields between 3.6% and 3.9%. The Jupiter fund has the highest ongoing charge, at 0.98%, but would probably be my top pick here: manager Jason Pidcock has a long record that suggests he’s a relatively conservative investor.
There are a couple of Japan dividend funds, but nothing with a particular long or special track record. And with overall yields still relatively low compared with other markets, Japanese dividends are in any case more interesting either as part of a wider Asian income fund or as one of the features of a general Japan equity fund. Trying to run a pure income fund with Japanese stocks is likely to lead you into buying poor businesses purely for above-average yields.
So my suggestion for the best way to capture the improving dividend culture in Japan would be a fund such as Lindsell Train Japanese Equity, even though the yield of 1.4% is certainly not an income play. Manager Michael Lindsell stresses that he looks for high-quality, growing businesses that pay a dividend as part of his investment process. The ongoing charge is 0.73%.
If you prefer an investment trust, or simply a higher yield, there’s the CC Japan Income & Growth (LSE: CCJI), whose name makes it clear that it’s more explicitly looking for a balance of yield and growth. This trust yields 2.9% and has delivered a respectable total return since its launch. The current share price is in line with NAV and the ongoing charge last year was 0.94%.
Finally, if you are interested in the same story in Korea, there is a small, niche fund that focuses specifically on the opportunity in discounted preference shares that I mentioned above: Weiss Korea Opportunity Fund (LSE: WKOF), which invests solely in these instruments. It yields around 2.7%. The ongoing charge is around 1.8% and the fund currently trades at a slight premium to NAV (although its assets – the preference shares – still trade at a substantial discount to the ordinary shares in many cases).
Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.
Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.
He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.
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