Why Should Investors Look At APAC For Dividend Income Investing?

This article was contributed to us by William Chang, Institutional Portfolio Manager, Templeton Global Equity Group and Ferdinand Cheuk, Portfolio Manager, Research Analyst, Templeton Global Equity Group.

With global equities pressured by multiple headwinds, dividend income remains an anchor of relative stability as investors seek to protect their portfolios amid uncertainties. A resilient source of dividend income may contribute to the steady growth of portfolio value, potentially helping investors weather market volatility and capture greater total returns over the long term.

Below, we briefly discuss the potential benefits of dividend income investing, and how investors can find ample opportunities in the Asia-Pacific (APAC) region to build a diversified equity income portfolio.

Sustainable Dividend Income Can Help To Underpin Long-Term Returns

A high-quality dividend stock portfolio is characterized by sustainable dividend income, which can provide investors with the peace of mind and resilience to stay invested. When an investment portfolio is supported by steady dividends and the reinvestment of these dividends, the impact of compounding over time can be quite substantial.

With a diversified dividend equity strategy, an investor can go even further. By combining different types of dividend stocks into a single portfolio, the strategy may capture yields from multiple sources for all-weather income generation. For instance, the portfolio may hold stocks with high dividend yields and growth that fare well under normal or even inflationary conditions, as well as stocks in defensive sectors—such as utilities and real estate–that have lower dividend growth but may sustain higher yields even in a recession. As such, the portfolio may provide complementary dividend income streams for return enhancement throughout an entire economic cycle.

For investors, this sustained income buffer may prove crucial especially when they look to navigate market uncertainties—as they do right now amid elevated inflation, rising interest rates, economic slowdown and geopolitical tensions.

Conventional wisdom suggests that hasty decisions are often detrimental to investment outcomes. Data indicates that panic selling during a market crisis typically reduces average returns compared to staying invested, as reflected by Exhibit 1. Additionally, a greater number of buy-sell decisions associated with market timing can potentially complicate the probability of achieving optimal outcomes.

Exhibit 1: Investment Results Vary Depending on Holding Periods After Market Crises

January 8, 1990–July 28, 2020

Having a steady stream of dividend income may be one way to insulate an investment portfolio against these potential pitfalls. With the relative stability of income generation, a well-constructed equity income portfolio can be held for longer to deliver improved total returns even as market and economic uncertainties loom.

Why APAC For Dividend Investing?

At Templeton Global Equity Group, we approach dividend income investing with a disciplined stock selection process, focusing on companies with resilient business and strong financials to offer an attractive and sustainable dividend yield as well as growth over the long term.

Attention is also given to how we incorporate the entire spectrum of yield types to ensure meaningful income generation across different macroeconomic conditions.

With that approach in mind, we see a fertile ground in APAC for opportunities to help build a globally diversified equity income portfolio. To start with, APAC equities stand out with very competitive dividend metrics when compared to the global market, as indicated by Exhibit 2.

Exhibit 2: Dividend Yields and Payout Ratios Across Americas, EMEA and APAC

As of July 31, 2022

Compared to the Americas and EMEA (Europe, Middle East and Africa) regions, APAC appears to have the highest average dividend yield, at around 3.9%, and average dividend payout ratio, at around 43.2%.

When we also consider Asia’s superior pace of economic growth, we think it is reasonable to expect APAC companies to remain the global leaders in offering dividend returns, as their business performance continues to track the region’s still vibrant and growing economy. As of June 2022, World Bank estimates for 2023 and 2024 GDP growth in the East Asia and Pacific region were 5.2% and 5.1% respectively, compared to 2.2% and 1.9% for advanced economies.

Our view is well supported by APAC’s dividend trend. APAC companies have demonstrated a commitment to improving shareholder returns over the years. As regional companies increase their payouts, dividends of APAC equities—as represented by the MSCI All Country Asia Pacific Index, which includes China and Japan—now account for a far larger share of total returns, up from just 20% in 2010 to around 40% as of May 2022 (as shown in Exhibit 3.)

Exhibit 3: MSCI All Country Asia Pacific Index Cumulative Returns

December 29, 2000– September 30, 2022

Furthermore, APAC companies have been increasing their payout ratios again, reversing the dividend cuts and suspensions in the past two years due to COVID-19 disruptions. At the same time, corporate balance sheets remain strong, in our view. Comparatively, a large percentage of companies across the major markets in APAC have a net cash position, a potential indicator of the ability to sustain dividend payout and growth.

The robust fundamentals seen in APAC companies, as we highlighted, are important to investors hoping to avoid dividend traps. Dividend traps are stocks with high dividend yields driven up by weak share prices, often due to poor business and financial profiles. Without the anchor of sound company fundamentals, these stocks may struggle to sustain their dividend policies, and could erode portfolio value as share prices persistently underperform.

Put another way, we believe exposure to high-quality companies in APAC should provide the added benefit of capital appreciation over the long term, on top of dividend income. As Asia’s economic growth continues, regional companies are solidly positioned for post-pandemic recovery, in our view. We believe this should translate to catalysts for APAC equities to gain, especially given that the MSCI All Country Asia Pacific Index is still relatively undervalued at a forward price-to-earnings ratio of 11.45[1], potentially providing another driver for total return enhancement should macro conditions stabilize, and markets find their footing for recovery.

[1] Source: MSCI, as of October 31, 2022

 

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