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The search for yield is driving investors toward stocks that pay dividends—and some of the most generous yields are in Asia, where stock prices are among the world's cheapest. While most international dividend mutual funds are heavily allocated to North America and Europe, few have major exposure to Asia. The main reason for that is U.S. investors tend to associate Asian companies with torrid growth and believe that profits are being reinvested in their businesses at the expense of dividends, much like at U.S. technology giants Apple (AAPL) and Google (GOOG).
But that conventional wisdom is not completely accurate, some portfolio managers say.
"If you look at history, Asia has been yielding over the years 75 to 100 basis points higher than the U.S. So this is nothing new," says Jesper Madsen, lead manager of the $2.3 billion Matthews Asia Dividend Fund (MAPIX) in San Francisco. "It seems like the marketplace is not fully appreciating the fact that Asia does offer the yield and that it also comes with a higher growth rate alongside."
It makes sense that high growth rates in Asian countries' gross domestic product and capital flows into the region would show up in dividend growth rates for the region overall, Madsen says. In an analysis done in the fall of 2010, Madsen says, he found that the aggregate dividend for the MSCI Asia Pacific Index rose at an average annual rate of 16 percent from 2002 to 2009, compared with a 6 percent dividend growth rate for the Standard & Poor's 500-stock index. Bloomberg data for the same period show that growth in Asian dividends outpaced U.S. and European dividends on an annual basis, albeit not quite as dramatically. (The Matthews study froze the indexes at their compositions as of Dec. 31, 2002, to avoid overstating dividend growth that would have resulted from including many high dividend-paying Asian companies whose initial public offerings occurred after 2002.)
Dividend growth on the MSCI Asia Pacific Index increased at a compound annual rate of 7.23 percent, vs. 4.85 percent for the S&P 500 and 4.83 percent for the MSCI EAFE Index, which includes companies across Europe, Africa, and the Middle East, according to Bloomberg data. "That goes counter to people's basic understanding of what investing is about," Madsen says. "They've been taught if you want growth, you have to sacrifice yield. But we've seen companies [in Asia] deliver both."
Indeed, the dividends paid by the 1,022 companies in the MSCI Asia Pacific Index totaled about $200 billion in 2010, on par with S&P 500 companies, Madsen says. S&P says the 500 companies in its index paid $205.3 billion in dividends last year. "It talks to the fact that this is a market that's already there," Madsen says. "It's present, available to be tapped."
Another psychological hump for investors to surmount is the belief that Asian companies carry greater risk, whether due to lower trading liquidity than well-established Western companies, less transparent corporate governance, or the uncertain treatment of minority shareholders. James Weir, co-manager of the Guinness Atkinson Asia Pacific Dividend Fund (GAADX), thinks those risks are overstated. Investors have more cause to worry about corporate and government balance sheets in Europe than in Asia, where debt levels have been managed tightly since the currency crisis of the late 1990s, he says. Weir believes a well-capitalized telecom provider in Malaysia, for example, is a better pick for investors than one in the United Kingdom based on a cheaper valuation, better earnings growth, and a higher dividend yield, typically in the high single to low double digits.
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