Total return strategy can counter volatility

Meanwhile, inflation is close to the 2 per cent level in many countries, with even Japan seemingly moving out of deflation. 

In an environment of rising interest rates, both traditional bonds and bond-like equities, so-called bond proxies, appear to carry more risk. 

While reflationary environments can be good for growth stocks, there remains enough uncertainty in the world – be it the elections taking place in Europe, the protectionist rhetoric in the US, or potential global trade wars – to keep investors from rushing to reposition just yet. 

 Dividend growers are often small- to mid-cap companies that occupy strong market positions in areas such as consumption, services and healthcare

So what is the best solution in these conditions? In an uncertain environment where rates are likely to rise, investors should focus on total return by investing in companies that offer attractive dividends relative to their share price, and can demonstrate the ability to grow their underlying dividends in a sustainable manner.

Because these companies generate sufficient cashflow to fund dividend payments and allocate capital prudently, they tend to have stronger corporate governance than their peers, and often deliver attractive capital appreciation as well as income.

Asia is an extraordinarily diverse region. It is home to frontier, emerging and developed markets, and there are dividend-paying companies throughout the region.

The continent’s equity markets have grown to represent nearly 40 per cent of global stockmarket capitalisation, while dividend payments have grown to about $286bn (£223bn), which is approaching the size of the dividend pool in developed Western markets.

Indeed, if you look at the underlying growth of the dividend pool in Asia, it has grown almost twice as fast as in the US, and has been four or five percentage points ahead of Europe over the past few years. 

Not only does this explain why dividend investing in Asia has proved popular in recent years, it also goes some way to explaining why this should remain the case even if interest rates do rise globally. 

The culture of paying dividends is also improving in the region, with countries like Japan and South Korea just beginning to enter the dividend growth space. It is due to this combination of government regulation and investor activism that these countries are increasingly offering opportunities to dividend investors. 

Investors that do not venture beyond established hunting grounds, such as Australia, miss out on opportunities not only in the emerging Asia markets such as Indonesia, Vietnam and China, but also within the more developed countries like Japan and South Korea.

Dividend growers are often small- to mid-cap companies that occupy strong market positions in areas such as consumption, services and healthcare. On the other hand, stable dividend payers are often large-cap, matured businesses in sectors such as telecoms, public utilities, and infrastructure assets.

A total-return dividend portfolio focusing on both dividend yields and dividend growth could include names ranging from small and mid caps that may be yielding 2 per cent, but potentially growing their dividends at a 15 per cent rate, to solid businesses that could deliver a stable and recurring dividend yield of 4-5 per cent. 

This balanced approach seeks to create a portfolio that can benefit from an attractive dividend yield without giving up on growth. 

In addition, it is important to focus on the sustainability of the dividend stream. Many Asian equity income portfolios are built with a lot of emphasis on yield, containing high-yielding stocks that can have challenging underlying businesses. 

But while investors can analyse companies, they cannot predict the future. Given the level of uncertainty, a strategy of total return can help income investors weather any upcoming storm. As the contribution of income strategies in Asia has been meaningful over the long term, it can offer a less volatile means to access the faster-growing economies in the region, while at the same time mitigating risk and providing downside protection.

Robert Horrocks is chief investment officer at Matthews Asia