Where are the regional opportunities for equity income?

Traditionally, developed market economies such as the US and UK have met equity income investors’ requirements.

Meanwhile Japanese and Asian corporates typically lagged in terms of paying out regular dividends to investors.

With dividend payouts now improving in many emerging markets and Japan, where should investors be positioned for equity income growth?

The US has been the “engine of global dividends” for the past couple of years, according to the Henderson Global Dividend Index.

But the engine appears to be sputtering.

There will probably be a bit of dividend growth in the US and companies linked to infrastructure will get extra cash from [president] Trump policies, which may lead to more payouts.Darius McDermott

North American dividends actually fell 7 per cent to $108.3bn in the third quarter of 2016, while payouts were down 7 per cent to $100.4bn.

The Index attributes the deceleration to more subdued profit growth among US companies, in part due to the stronger dollar, but the slowdown is also a reflection of higher indebtedness at corporates, prompting cashflow preservation.

For 2016 as a whole, headline dividends in the US rose only 1.5 per cent to $412.5bn and while underlying dividend growth was a more robust 4.1 per cent, this follows double digit growth in 2014 and 2015, the Index points out.

US slowdown

Andrew Jones, global equity income manager at Henderson Global Investors, notes: "The US market has a lower dividend yield in aggregate than many markets at around 2 per cent but there are still many attractive income opportunities at a stock level."

Darius McDermott, managing director of Chelsea Financial Services, reassures investors: “There will probably be a bit of dividend growth in the US and companies linked to infrastructure will get extra cash from [president] Trump's policies, which may lead to more payouts.”

Henderson Global Investors allays investor fears by pointing out dividend growth in the US was expected to return to a more sustainable level after some years of double-digit growth.

The US is likely to continue to contribute to the global equity income part of a portfolio but investors may want to diversify by region to make up any shortfall. 

Nicolas Simar, portfolio manager for the equity value strategy at NN Investment Partners, says the UK market is offering the highest 2017 dividend yield at 4.4 per cent, followed by the eurozone with a 3.4 per cent dividend yield. 

Japan remains a fertile hunting ground for income, with monetary policy and negative interest rates encouraging companies to return capital to shareholders through increased dividend payouts and share buybacks.Harry Wells

Emerging markets, the US and Japan offer lower levels for 2017 at 2.9 per cent, 2.4 per cent and 2.2 per cent respectively, he adds.

He urges some caution in the UK market which relies on commodities to contribute significantly to that 4.4 per cent.

“Without the commodity side of the UK market, the average dividend yield falls just below 4 per cent,” he points out. 

“Moreover the UK market is the one offering the highest payout ratio (above 60 per cent) and therefore offers the lowest margin of safety on dividend sustainability, while Europe ex-UK (with around a 50 per cent payout ratio) and the US, Japan and emerging markets (around 30-35 per cent payout ratio) offer better dividend coverage ratios.”

Mr Simar comments: “[The] eurozone is a particularly interesting area to consider as economic recovery will support EPS [earnings per share] growth in 2017 - consensus is expecting 10 per cent to 12 per cent EPS growth for 2017.

“This earnings recovery, mostly driven by financials and energy, will support dividend growth in the euro area in 2017. We should hope for high single-digit figures there.”

Europe and beyond

In Europe last year, dividend growth actually outpaced that of many other regions, the Henderson Global Dividend Index reveals, including the UK and emerging markets which lagged.

European dividends expanded 4.3 per cent in 2016 on a headline basis to $219.6bn, although this diverged significantly across the region, with the standout performers France, the Netherlands and Denmark.

“Further down the line in Europe, we will have to wait and see what impact Brexit and upcoming elections have on European economies and company profitability,” Mr McDermott cautions. 

He recognises there remains a lot of support from the European Central Bank though, and does not see any “imminent problems” with regard to dividends in the region.

For Adrian Lowcock, investment director at Architas: “Both Europe and Japan are at more reasonable levels with respect to their historical averages compared to the US market which looks more expensive, in particular companies with good balance sheets and well covered dividends. These can usually be found in consumer and healthcare sectors.”

Japanese companies have begun regular dividend payments as part of overall improvements in corporate governance.

As a result, Japan is becoming a dependable equity income stream for investors.

In 2016, currency both helped and hindered Japanese companies, with the stronger yen boosting headline dividend growth rate of 24.4 per cent, although in underlying terms, actual dividend payouts were hit as they dipped by 0.2 per cent as company profits were hit by the currency's strength, according to the Henderson Global Dividend Index.

Harry Wells, chairman of the CC Japan Income and Growth Trust, observes: “Japan remains a fertile hunting ground for income, with monetary policy and negative interest rates encouraging companies to return capital to shareholders through increased dividend payouts and share buybacks.”

Richard Aston, portfolio manager of the Trust adds: “The majority of Japanese companies remain in a robust financial position with the outlook for aggregate earnings growth boosted by the recent weakness of the yen. 

“We expect 2017 to be another good year for shareholder returns in Japan. Nikkei have recently announced the launch of the Nikkei 225 High Dividend Yield Stock 50 index which will further raise awareness of the availability and quality of income from Japanese equities.”

It is part of a growing trend across Asia as many companies have begun paying dividends for the first time or keeping up with regular dividend payments.

There are now a number of funds providing exposure to Asian income – a quick search of FE Analytics for Asia and Asian income funds brings up 13 offerings.

Mr McDermott believes Asia is providing the best opportunities for dividends of all the regions.

“Payouts in a number of Asian countries are very good and there are more governments now looking to increase corporate governance,” he reasons. 

“Add to this the fact that many are facing an ageing population, like us, and the need for yield is not going away so companies are being encouraged to pay dividends.”

But Andrew Wheatley-Hubbard, portfolio manager of the BlackRock Global Equity Income fund, suggests where the companies are listed is less relevant than where their cashflows are coming from.

This leads him to believe the best dividend growers are those companies exposed to emerging markets-based consumers.

“Despite the recent fears of slowing growth in Asia and Latin America and fears around the impact of a Trump presidency on emerging markets, the underlying growth in disposable income is likely to prove structurally supportive for increased consumption of certain products,” he explains.

“Companies with great brands that can provide the ‘right’ products and win consumer loyalty via a profitable business model should do well.”

If investors are less inclined to want exposure to equity income through one region they can instead invest via a global equity income fund, thus leaving the decision making to the fund manager.

Net retail sales of the IA Global Equity Income sector recovered towards the end of 2016, following outflows of £143m in June last year, due to heightened nervousness around the EU referendum in the UK.

By November 2016, inflows into the Global Equity Income sector had reached £54m, followed by another positive month of net retail sales in December of £40m.

Mr Jones concludes: “It is possible to find companies in all regions that are expected to deliver good dividend growth.”

eleanor.duncan@ft.com