Far Eastern promise

Income now represents a substantial portion of the long-term total return from Asian equities. Investment strategies based on dividend yields also continue to be among the strongest performing in the region.

Equity-income approaches largely come into their own in the period after a crisis as investors revert towards quality. By nature, dividend-focused strategies are highly exposed to companies with strong fundamentals as these firms are most likely to deliver on dividend commitments.

With global headwinds likely to continue hitting Asian economies hard, delivering on earnings will be an increasingly important driver of market activity over the medium term.

In spite of the market’s traditional focus on share price rises, historically almost two-thirds of long-term equity returns in Asia have come from dividends.

Unlike share price rises, which are sensitive to a range of factors, including non-fundamental concerns such as sentiment and momentum, dividend return represents actual cash paid out by companies to their shareholders.

In addition, because dividends can only be paid out of earnings, which are in turn driven by the economy, dividend return tends to have a stronger correlation with existing economic conditions than share-price appreciation.

Investors seeking exposure to the multi-decade story of Asian economic growth will do well to pay close attention to the dividends that they are capturing from their equity investments.

Managers of companies have better information about their future prospects and, ultimately, want to avoid cutting dividends, so they will often only pay high dividends today if they are comfortable that their earnings in future are strong enough to sustain the high payout.

This is also why, in practice, companies that have high dividend payouts usually experience much faster subsequent earnings growth than their low dividend-paying counterparts. Academics have coined this the ‘dividend-signalling effect’.

In a region laden with corporate governance landmines, focusing on dividends when investing in Asia has the benefit of helping investors avoid potential blow-ups. By returning excess cash to shareholders as dividends, companies avoid the temptation to squander that money on value-destructive investments, while subjecting themselves to more stringent levels of stakeholder scrutiny when they next tap the markets for funds.

Focusing on dividends also helps investors avoid companies with dubious earnings, as these companies are unlikely to have the actual cash required to make dividend payments. Owing to these factors, companies with strong dividend payouts tend to possess higher corporate governance standards in Asia.

With high dividend-paying companies having stronger future earnings growth and better corporate governance, it is little wonder that, over the past 20 years, high dividend-yielding stocks have outperformed both the market and low-yielding stocks in Asia.