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.
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
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.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A.
Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
Some or all of the Annual Management Charge and other costs of the Fund may be taken from capital, which may erode capital or reduce potential for capital growth.
The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.