Robert Horrocks of Matthews explains how investors can use dividend-paying stocks as a way to generate income in their portfolios, and looks at how they can tap these opportunities.
Date: Feb 2012
Tags: Income, Dividends, Equities, Fixed income
Given that everybody thinks about Asia as a growth region, the truth is that investing in companies which pay out a reasonable amount of cash and which are committed to growing the dividend at a time, is an excellent way to invest in the region over the long term, he explained.
People also forget that Asia currently has one of the highest dividend yields in the global marketplace, coupled with a greater prospect of dividends being sustained, added Horrocks.
Those dividends also give investors a certain amount of security that the cash is there on the balance sheet, that the earnings are true earnings, and that management cares about minority investors with a sensible policy towards managing the capital in the business.
Issues to consider with dividend plays
What investors are really looking for in dividend investing, said Horrocks, is the potential to grow and sustain the dividend over time.
A lot of high-yielding equities might not appear that way, he warned, whether because they are cyclical businesses, or there might be some questions about the sustainability of the yield.
For people looking at the long-term development of Asia, growth will be in consumer-facing businesses, the health care industry, and any other sectors where there is an ability to grow a brand and become part of a consumer’s everyday psychology. These are the ways to build more sustainable business models, he said.
Tools to access these opportunities
For investors looking to access opportunities themselves, Horrocks said they need to decide whether looking for the individual business to invest in is the best use of their time, or whether they want to look for an investment professional to do it for them.
There is the potential to build ETFs around this kind of strategy, he added, although there are only a few products available for the time being to enable this to happen.
Ultimately, said Horrocks, the best thing investors can do is to try to build a diversified portfolio, because there is no one method to guarantee success.
Assessing ability and willingness to pay dividends
According to Horrocks, it is easier to analyse a company’s ability to pay dividends – a company either has a stable profile or a cyclical one.
Willingness to pay, however, is a different thing, as some businesses can pay, but might not want to. For example, there might be issues such as empire building where the chairman is looking to diversify the core competency of the business so wants to reinvest capital in that business to grow market share or create a legacy for themselves – rather than benefiting the shareholders. This can be difficult to judge.
Further, even if businesses develop a track record of paying dividends over time, that could be reversed by one or two people with a desire to create some kind of new legacy.
Other income opportunities
Another interesting investment Horrocks sees in Asia is fixed income. While these markets have been relatively less developed to date than in many other parts of the world, he said he thinks they will be progressively grown over the coming years as companies are encouraged to be less dependent on bank loans and instead look to raise money more directly.
In addition, in Asia, levels of debt are generally quite low, so Horrocks said he would expect these economies to increase their debt load in the coming decades.
