High-yielding equity income strategies have historically produced strong long-term returns.
While this is a relatively well-known feature of developed markets, it is perhaps less well appreciated that this approach has also worked well for investing in Asian equities excluding Japan.
Moreover, it has been possible to enhance the returns available from a pure dividend strategy by augmenting such an approach with a value overlay.
As an example, for the performance of Asian equities ranked by dividend yield across the past 15 years, the universe every month can be ranked according to dividend yield and split into quintiles.
Quintile one reflects the 20 per cent of stocks in the universe with the highest dividend yield, while quintile five contains the 20 per cent with the lowest dividend yield.
It’s been noted that figures for these Asia equities get progressively worse from quintile one to quintile five.
Quintile one produces a compounded annual growth rate (CAGR) of 21.8 per cent from the end of December 1999 to end-January 2015 relative to 2.2 per cent for quintile five. In addition, in this example quintile one is the best-performing section in 11 out of the 15 years.
It is also possible to enhance this approach with a value overlay. For every month, the top 40 per cent of stocks in the Asian equity universe is ranked according to dividend yield.
Of those stocks, they are then ranked according to price-to-earnings (P/E) ratio, with the low P/E stocks considered better value.
The results are surprisingly good. As with a pure dividend approach, there is a clear improvement in returns moving from the expensive end of the spectrum (quintile five), which produces a CAGR of 8.9 per cent, while the cheaper end (quintile one) delivers a CAGR of 27.6 per cent.
In addition to the supportive longer-term evidence, there are various reasons why Asian stocks generally and high-dividend-yielding stocks in particular look attractive.
First, it can be noted that the dividend yield is in excess of the 10-year government bond yield in five out of the 10 countries in the analysis – China, Hong Kong, Singapore, Taiwan and Thailand.
Moreover, the low yields available on many developed market government bonds should support flows from foreign investors searching for other sources of income. Sometimes low government bond yields imply a weak economic environment and this can detract from the validity of comparisons with dividend yields.
However, Asian growth is well supported by the low price of oil, positive political reform in countries such as India and Indonesia, plus policy stimulus both within the region – for example, China and Japan – and outside the region, such as European quantitative easing.
There is no guarantee that following a pure dividend strategy or a dividend-plus-value approach will continue to produce strong returns in the future.
Moreover, it is quite possible there will be periods during which such strategies underperform other investment methodologies.
However, the strength of the results and several supportive factors for Asian dividend stocks suggest this may be a sensible approach to follow.
Daniel Murray is chief economist at EFG Asset Management
