In this video, Sat Duhra, Co-Manager of the Asian Dividend Income Strategy with Mike Kerley, discusses the sectors that are likely to offer the most attractive dividends and, how improving corporate governance is boosting the dividend culture in Asia. Sat also examines portfolio positioning and key risks for investors. 

This video was recorded in November 2019.

   Key takeaways:

• Corporate reforms are benefiting dividend-paying stocks especially in Asia where the potential for dividend surprise may be higher
• Dividend-paying stocks are playing a larger role within portfolio construction as investors begin to look more towards Asia for yield
• Sectors such as energy appear to offer more value now, while selectivity is key in technology as some areas of this sector can be overpriced

Transcript

In the current investment climate, which sectors are offering the most attractive dividends?

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 (real estate investment trusts), telcos (telecommunications), infrastructure assets, and more into materials, energy, and technology. So those three sectors have performed well over the last three months or so, and that’s because, firstly, they’ve started to look cheap. In technology, for example, semiconductors are looking a little bit better.

And also the (US-China) 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 (many of) these stocks is still very high. And, also, they represent value, and energy certainly is a real value sector at this point (in our view).

What are the key challenges when investing in those sectors?

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 to-ing and fro-ing where we think it’s going to happen and then not happen, has really been a feature of (global) markets and a great cause of volatility in our markets as well.

How much progress has been made in terms of Asian companies’ dividend culture?

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.

We think that, for our (Asian Dividend Income) 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, (share) 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 is 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.

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

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 (companies) 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.