Five charts showing the attractions of Asian equity income
Asian shares offer a compelling proposition when it comes to investing for income.
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Interest rates may be on the rise but investors searching for higher income will still want to consider the merits of dividend-paying shares. Income investors often look to UK shares. However, Asian equities also hold significant attractions for income investors, and can help provide diversification.
The chart below shows how dividend yields in the Pacific ex Japan region are above those on offer in other non UK markets, and comfortably ahead of regions like the US. The dividend yield is the dividend per share, divided by the price per share.
Added to their higher yields, Asian companies are operating in a region that is forecast to enjoy higher economic growth than other parts of the world over the next five years, as the next chart shows.
You may argue that overall GDP growth has little to do with investment returns. But as an income investor I’m looking for companies which are able to grow their income and dividends over time. Given the choice, I’d rather be doing that in an environment of higher economic growth than lower growth.
Then we come onto the opportunity set for income investors in Asia. The chart below shows the percentage of companies in different regions with a dividend yield above 3%.
As we can see, around 50% of companies in Pacific ex Japan and in Europe fulfil that criteria. By contrast, the percentages in the US and Japan are much smaller (around 33% and 18% respectively).
This is a fairly blunt measure but nevertheless demonstrates that income investors in Asia have a broad universe of companies to pick from.
Next, dividends in Asia come from a relatively large number of companies, whereas in the UK they are much more highly concentrated in just a handful of stocks.
The chart below shows how fewer than 10 stocks make up 50% of the income from the MSCI UK index. By contrast, the corresponding figure for Asia is close to 50 stocks.
Again, this highlights the wider opportunity set that Asia offers for investors to choose from. This greater number of income payers making up 50% of the income also potentially makes Asia a more resilient source of income as it means investors are less reliant on any single company than they are in the UK.
The final chart illustrates another key consideration for income investors: the resilience of company dividends. The chart below compares the dividend pay-out ratio of companies in the Asia ex Japan index compared to that of the UK index.
The pay-out ratio is the proportion of earnings paid as dividends, and as we can see this is lower in Asia than in the UK.
What this means is that if the economy slows and earnings become more volatile, Asian companies on average have a buffer.
We’ve seen over time in Asia that when earnings come under pressure, companies that have a lower pay-out ratio don’t necessarily have to cut their dividends. Instead, this buffer gives them the flexibility to allow pay-out ratios to rise until earnings have recovered.
A lower starting pay-out ratio also offers potential scope for future dividend growth.
Taken together, we think these charts show that Asian shares are an attractive proposition for income investors, offering both higher dividend yields than many other markets in combination with a wide set of opportunities.
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