Seeking high dividend stocks in Asian markets

This is not just a short-term tactical strategy but one which can also pay off in the long run.

Mon, Oct 25, 2010
The Business Times

By Eric Sandlund

INVESTORS probably don't need reminding of how low deposit rates are.

In Singapore, the average savings rate is 0.14 per cent while 12-month fixed deposits are offering only 0.47 per cent. And it is likely that interest rates will stay at these low levels for a while longer.

A lot depends on what happens in the US. The US economic recovery has been a wobbly one and the US Federal Reserve has signalled that it may embark on more 'quantitative easing' to support the economy.

Quantitative easing encompasses a range of possible policy actions but its main objective is to push down interest rates.

Singapore interest rates are influenced by the actions of the Fed and very low interest rates in the US mean very low interest rates here.

If investors take the current 3 per cent inflation into account, real interest rates are not just low but in fact negative. Not surprisingly, holding cash is unattractive and investors want alternatives.

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An environment flushed with so much liquidity should in theory benefit equity markets but investing in equities this year has been challenging.

Investors have had to cope with large gyrations in the market as sentiment has been switching between 'Risk On' and 'Risk Off'.

Range bound

UBS is not in the 'double-dip' camp but we expect equity markets to be range bound until there are clear signs that the US economy is not entering another recession.

We remain positive on Asia's economic prospects and believe that the region's superior growth and earnings will in due course be reflected in equity prices.

However, until investors are ready to reward growth, we have tactically adopted a defensive strategy of seeking high dividend stocks in our Asian equity positioning.

Dividends are not traditionally a focus of investors in Asia. After all, investors buy Asian equities for growth.

During bull markets, the capital gains are sizeable and dividends are dwarfed.

In a trendless market, dividends are, however, attracting more attention from investors.

As at the end of September this year, the MSCI Singapore index was up 7.2 per cent , with a capital return of 4.5 per cent and dividends contributing 2.7 per cent.

Investing in stocks for their dividends is in fact not just a short-term tactical strategy but one which can also pay off in the long run.

What many investors probably don't realise is how much dividends have contributed to total equity returns over time.

Take the last 10 years. For Singapore, dividends have contributed a 66 per cent of total equity returns while in Hong Kong, the number was even higher, over 80 per cent. For the region as a whole, dividends have accounted for over 40 per cent of total returns in the last 10 years.

Dividends matter so much in Asia because of the high level of volatility of Asian equity markets. Market declines, when they occur, can be so deep that large portions of previous capital gains are often wiped out.

Any investment strategy comes with risk. Buying a stock for its expected dividend payout means taking a risk that the dividends do indeed materialise and cash is actually paid back to shareholders. Dividends are a function of earnings. If earnings decline, dividends will decline.

A company can also choose to do a number of things with its cash. It can reduce its debt level, it can embark on capital spending, it can engage in mergers & acquisitions, or it can pay dividends. A company which cuts its dividends will not infrequently see its share price punished by the market.

A successful dividend strategy really requires two sets of capabilities.

First, for efficiency, you need a quantitative tool to screen for high dividend stocks from the rapidly expanding Asian equity universe.

Equally important is the ability to select the companies which will not disappoint in their dividend payouts. That's the qualitative aspect - experience, skill and hard work.

Diversification

An added risk with a dividend strategy is that high dividend stocks tend to be concentrated in certain markets and certain sectors. These would typically be the more developed Asian markets of Singapore, Hong Kong and Taiwan and the more defensive sectors such as telecoms and utilities. Like any other portfolio, a dividend focused portfolio should be sufficiently diversified, to balance risk with reward.

Although a dividend strategy is primarily seen as a defensive strategy, it is nevertheless possible for skilled managers to generate alpha over the course of the full cycle and outperform the broader market.

This is because high dividends and growth are not mutually exclusive in Asia. A company can offer both sustainable dividends and capital gains if it does not blindly pursue growth but adopts business strategies which are sustainable. These, you could say, are the true blue chips in Asia.

The writer is head of UBS Investment Management APAC