While the hunt for yield has been an ongoing theme for investing over the past few years – with interest rates steadily decreasing, and market volatility ongoing – the situation has been exacerbated this year with the financial market fall out from COVID-19. In particular we have seen once reliable dividend payers such as the banks slashing their distributions, which has had a marked impact on their shareholders financial bottom lines.

For Australian investors, such as retirees, who rely on this income to live, it has been a particularly difficult time, and they have had to search hard for alternative income producing investments. For many of them, it has meant taking on higher levels of risk then they are strictly comfortable with, in order to generate sufficient income.

Investing in a shallow pool

The Australian share market – although a popular option with investors, not least because of the opportunity to receive income as a tax paid dividend – represents only a very small proportion of share market investments globally. Those investors that focus all their investing attention locally, are missing out on some attractive options in other regions, in companies and sectors in growing industries that aren’t well represented in Australia.  As such, they are missing a whole host of good investment opportunities.

But there are other options. A compelling opportunity remains for investors who do consider looking outside Australia for dividend-paying companies in Asia. In the current environment, we see the Asian region offering investors better return prospects from higher earnings growth and increased dividend distributions, supported by rising free cash flows and strong balance sheets.

Historically, many Asian companies have maintained modest dividend payout ratios, preferring to hoard cash or fund expansion.  This situation has been changing however, with a range of high profile corporates across the region becoming increasingly shareholder focused, suggesting an increased awareness of the virtues of growing dividends as well as simply growing earnings. Increasingly we are seeing companies adopting more generous distribution policies, a move that has been welcomed by the market.

In this environment, Asia offers a somewhat unique opportunity for investors to benefit from the combination of growing earnings and an increase in dividends due to the regions inherently low gearing and modest payout ratios.

Asian markets outperformance

Indeed, it seems that the market has been rewarding those companies that have displayed an increasing payout ratio, with a clear pattern of outperformance seen from these companies. There continues to be strong scope for enhanced returns from growing dividends from a range of companies across a number of markets in Asia.  The scope for payout ratios to rise from their current levels across Asia is greater than what we observe elsewhere in the world (refer Chart A).

 Chart A: Scope for higher returns with dividend catch up – Asia payout ratios remain below developed markets

* MSCI World Index excludes Emerging Markets

Source: CSLA, data from January 2004 to October 2020.

Asia has the strongest aggregate balance sheet position of any equity market region globally. There are more net cash companies found in Asia than anywhere else in the world. Similarly, the net debt to equity position for Asia is significantly stronger than anywhere else in the globe. As a consequence, strong balance sheets coupled with an improving outlook for earnings growth for many markets entering a recovery phase post COVID-19 is providing a favourable pre-condition for dividend growth.

The payout ratio for the Asian region is among the lowest globally at 36%. This compares to the World Index at 45% and Australia at 72%.[1] The scope for dividends to both be sustained and grow as a consequence of recovering earnings and an increased payout ratio is therefore considerably enhanced in Asia due to these factors.

At Maple-Brown Abbott, we have been investing in the Asian equity market since 2002. We believe there is good potential to achieve attractive levels of yield by investing in stocks that are able to both sustain and grow their dividends relative to the market.

This information was prepared by Maple-Brown Abbott Limited ABN 73 001 208 564, Australian Financial Service Licence No. 237296 (Maple-Brown Abbott). It does not constitute advice and should not be relied upon as such. This information is intended to provide general information only, and does not have regard to an investor’s investment objectives, financial situation or needs. Investment advice should be sought in respect of individual circumstances. This is not an advertisement and is not intended for retail investors as defined by section 761G of the Corporations Act 2001 (Cth). Past performance is not a reliable indicator of future performance. Maple-Brown Abbott Limited does not make any representation or give any guarantee as to the future performance or success of, the rate of income or capital return from, the recovery of money invested in, or the income tax or other taxation consequences of, any investment. To the extent permitted by law, neither Maple-Brown Abbott, nor any of its related parties, directors or employees, make any representation or warranty as to the accuracy, completeness, reasonableness or reliability of the information contained herein, or accept liability or responsibility for any losses, whether direct, indirect or consequential, relating to, or arising from, the use or reliance on any part of this material. Any views expressed, are point in time views and may be based on certain assumptions and qualifications not set out in part or in full in this information. Information derived from sources is believed to be accurate, however such information has not been independently verified.

This information is current as at November 2020 and is subject to change at any time without notice.

[1] Source: MBA FactSet 31 October 2020