As investors realise the need to view market opportunities and allocate assets in a different way in today’s uncertain landscape, dividend paying stocks can offer an effective income play Striking the right balance between bond proxies and cyclical yield.

Key takeaways

• Corporate reforms in recent years have led to performance benefits for dividend paying stocks, especially in Asia where investors can get a unique mix of income plus capital growth
• Dividend paying stocks are well positioned to play a larger role within portfolio construction going forward
• Investors have been rotating out of defensive income generating sectors such as REITs, telcos and infrastructure, and into more cyclical names in the materials, energy and technology sectors

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In the current investment climate, where should investors look for attractive relative dividends?

Sat Duhra: There’s been a change in terms of the way the market is looking at growth; so there’s been clearly a rotation away from some of the more steady income type of stocks, REITS, Telco’s, infrastructure assets, and more into materials, energy, and technology. So those three sectors have performed very well over the last three months or so, and that’s because, firstly, they’ve started to look cheap. Technology, for example, semiconductors are looking a little bit better.

And also the trade war seems to be much closer to a resolution that it was three or six months ago, and I think that’s something that bodes well for these kinds of stocks. Now, doing that, you’re not compromising on yield; the yield on these stocks is still very high. And, also, they represent value, and energy certainly is  a real value sector at this point.

Are there any challenges within these sectors?

Sat Duhra: The first point to note is that valuation is still not as attractive as it has been for some of these sectors. So we’ve made a move into these sectors, but very selectively. And given our higher energy exposure in the past few years, we’re still very positive on that but we think one has to be very careful with technology. There are some very highly-valued stocks in the technology space and they don’t have the free cash flow or the yield to justify us looking at that.

So that’s the first thing. The second thing is that you can be too bullish on the outcome for the trade talks, and we’ve seen over the last 18 months that there’s toing and froing where we think it’s going to happen and then not happen, has really been a feature of market and a great cause of volatility in our markets as well.

What does the region’s current reform agenda mean for dividend paying stocks?

Sat Duhra: Well, if you go back over the last five years or so, there’s been a tremendous impact on dividend stocks from reform. Mostly it’s come in the way of anti-corruption, cleaning up corporates and those kinds of things. And we think that, for our strategy, we’re direct beneficiaries of that move. What happens is that corporate behaviour gets better; they take more care of their minority shareholders, so we start seeing more dividends, buybacks, those kinds of things.

And that’s really been the story of Asia; over the last ten years Asia has seen the biggest increase in dividend growth versus any region globally. And that’s something we don’t see changing; I think if you look at pay-out ratios being still quite low in Asia, we see the momentum still there for corporates, willing to change, willing to pay out that huge cash on the balance sheet, that free cash flow, this is very positive for dividend stocks in Asia.

And what Asia does is give you income and capital growth, and that’s a unique feature of Asia which we don’t see in any other region.

How do dividend paying stocks fit into the evolving approach to portfolio construction?

Sat Duhra: Over the years we’ve seen a big improvement in that shift towards dividends, so you’ve seen really cyclical sectors, materials and energy, for example, the Australian miners, really change the mindset of investors. So now, in Australia, for example, people are looking towards those iron ore plays and those big miners for yield, rather than what’s happening to commodity prices.

And that’s a real shift and corporates have done a great job of saying we’ve got this free cash flow, we’ve got non-core assets we will dispose of, and we’ll pay you the dividends. And that’s a very strong message coming from managements across Asia. So I think that’s something that we shouldn’t overlook, is that, firstly, there are high dividends already in Asia, but these stocks are able to surprise on dividends, and that’s the key thing, is that positive surprise leads to capital performance. So you can have income and capital growth.