Anyone seeking both a growing dividend and a decent headline yield should look to Asia, according to Fidelity’s Jochen Breuer, who says political pressure to make companies more shareholder-friendly has helped him increase payouts to investors at a compound annual growth rate of 18.1 per cent.
Source: Fidelity
The powerful demographics that have made Asia an attractive destination for growth investors are well established, including a young and rapidly expanding population and a developing middle class. However Breuer, who runs the Fidelity Asian Dividend fund, said that less well known are the attractive conditions for income investors, with average yields in the region standing at 3 per cent.
“That is higher than the global market and significantly higher than the US, which has a similar payout ratio,” he explained.
“If you look within Asia, you have more developed countries such as Australia, Taiwan and Singapore that have tax advantages for companies that pay higher dividends and deliver high headline yields, but probably with lower growth prospects.
“On the other hand, you have some of the more emerging countries such as India, China and the Philippines where payout ratios are significantly lower, around 30 per cent, but that can deliver higher dividend growth.
“Taking that together allows me as an income investor to put together a portfolio which has an attractive headline yield, but that can also deliver dividend growth over time.”
Dividend growth in the MSCI Asia ex Japan index stands at a compound annual growth rate of 12.3 per cent over the past 15 years, according to data from Fidelity, higher than the 11 per cent from MSCI Japan, 8.7 per cent from MSCI USA and 7 per cent from MSCI AC Europe.
Source: Fidelity
Breuer said that rather than coming to the end of this dividend growth run, strong fundamentals and tailwinds across Asia suggest this outperformance looks set to continue over the coming years.
“Balance sheets for Asian companies are still very, very attractive,” he continued. “It is very different from the US, for example, where you have seen companies leveraging up their balance sheets in order to buy back shares. We've seen very little of that in Asia.
“And at the same time, what we've seen over maybe the last two or three years is political momentum from governments encouraging companies, especially in the state-owned sectors, to pay out higher dividends.
“That started initially in Japan, but we've seen it in China, where payout ratios have been rising among SEOs [state-owned enterprises] and in Korea where companies like Samsung Electronics are now paying dividends.
“And interestingly this year, a new development around dividends has been that more and companies have started to pay out quarterly. TSMC is an example, or DBS in Singapore, the bank. It just shows you there is more recognition in terms of the shareholder-return policy.”
Breuer looks for companies with strong balance sheets, consistent earnings, good cash generation and capital allocation discipline, and also applies a “stringent valuation framework” to reduce downside risk. While he aims to deliver a dividend that is higher than the market’s, he considers himself a total return investor first and foremost, with the dividend playing an important role in achieving this.
He splits dividend-paying companies into five categories, where out-of-favour cyclical names with a high dividend yield occupy one end of the valuation scale and bond proxies the other. However, he is struggling to find opportunities in either one of these extremes at the moment.
“Those bond proxies are fairly expensive, very well loved by the market,” Breuer said. “And on the other side, you have the more cyclical part of the portfolio where you have to be quite cognisant in terms of where we are in the cycle – at a late stage, 10 years into an upturn.
“What we're trying to achieve in the portfolio – keeping an attractive headline yield but also stable dividend growth – means that I find quite a few ideas in those middle buckets, which I call growth at a reasonable yield or low volatility yielding stocks.
“These are the kind of names which have been, for one reason or another, de-rating with the market for idiosyncratic reasons and offer attractive opportunities to buy higher-quality franchises at attractive valuations.”
It is impossible to talk about Asia at the moment without discussing the US-China trade war. Breuer admitted this is front and centre when he thinks about risk, so he avoids the companies worst affected by tariffs.
However, he said investors also need to think about secondary effects, which is why it is so important to have regional diversification in his portfolio – not in terms of where companies are listed, but in terms of where they make their money.
For example, while almost 22 per cent of his portfolio is in Hong Kong-listed companies, the country accounts for less than 10 per cent of sales.
“Having a well-diversified portfolio is very important, especially if you have a concentrated portfolio of 40 names like in my case. It's important to be mindful in terms of the correlation of individual companies to each other and within countries, so this is something I am focusing on, to avoid anything that can make my strategy underperform,” he finished.
Data from FE Analytics shows Fidelity Asian Dividend has made 92.46 per cent since launch in September 2013, compared with 63.78 per cent from the IA Asia Pacific ex Japan sector and 38.21 per cent from its MSCI AC Asia Pacific ex Japan High Dividend Yield benchmark.
Performance of fund since launch vs sector and benchmark
Source: FE Analytics
Someone who invested £10,000 into the fund at launch would have received £2,279.25 in income alone since then.
The £64m fund is yielding 3.56 per cent and has ongoing charges of 0.9 per cent.