Given that so many UK companies have been flinging their dividends on the bonfire to guard against the threat of coronavirus, investors wanting income have been left with slim pickings.
Investors should not try and chase dividends but remember that an investment in shares is, in a sense, not just for Christmas.
“Equity is a long duration asset,” said Matthew Jennings, Fidelity International’s investment director for equities, “and a single year’s dividend is not a major part of the intrinsic value of a business.”
While in normal times cutting dividends can signal a company in distress, Jennings argues in a white paper published on Tuesday, “when it’s the economy itself that’s in distress, cutting or delaying dividend payments can be a sign of corporate prudence”.
Shrewd investors have, however, already dipped in to take advantage of the indiscriminate selling in March and the firms with the strongest balance sheets are already showing signs of relative outperformance.
East of income
For those with cash to invest and sceptical of the UK’s ability to stride out of the crisis in the best shape, Asia investment trusts might be an option.
Income funds focused on Asia have yields in excess of 5%, long track records of dividend increases and substantial revenue reserves to supplement dividends in lean times, analysts at Stifel noted.
“Asia is already coming out of the pandemic,” said Stifel’s Anthony Stern in a recent note, with the region ahead of the West in exiting the crisis, with China coming out of the lockdown and returning to work.
“This puts the Asian funds ahead of their peers in recovering from the crisis.”
Dividend stocks across Asia have outperformed the broader region after previous selloffs, agrees Jochen Breuer, a portfolio manager at Fidelity International, pointing to the relative performance of the MSCI Asia Pacific ex-Japan High Dividend Yield and the MSCI Asia Pacific ex-Japan indices in 1999-2002 and 2007-2010.
“Investment companies in the Asia Pacific Income sector currently offer a healthy average yield of 6%,” said Annabel Brodie-Smith, communications director of the Association of Investment Companies, “and the majority also have revenue reserves which they can draw on to support dividends payments during difficult times such as these.”
China dividends in your hand
Looking specifically at greater China, Breuer notes that many big companies were steady dividend payers through previous rounds of market turbulence and the government’s sustained calls to increase shareholder returns.
“There has been a particular focus among companies from mainland China, specifically those that count the state as a major investor, on increasing dividend payouts in recent years.”
Recent examples that recently announced dividend increases include telecom giant China Mobile, miner Shenhua Energy and state-backed property developer China Overseas Land and Investment.
Other strong names from the greater China region include chipmaker Taiwan Semiconductor (NYSE:TSM), which paid out $8.4bn in dividends last year, and Hong Kong-listed trio CK Infrastructure, Sun Hung Kai Properties and Guangdong Investment.
“Generally, state-owned enterprises (SOEs) with strong cashflow are more likely to heed [the government’s] call,” said Breuer.
“Their cash distributions help to boost the coffers of various government units that hold SOE shares, especially in a slowing economy.
“Big dividend payers tend to include the largest SOEs, which are often financial firms, energy producers and real estate developers with cyclical profits. Many of them still have strong balance sheets this year that allow resilient distributions.”
Nevertheless, he acknowledges that profit outlooks for Chinese companies in general are far from easy street, with the Covid-19 outbreak hurting both exports and domestic consumption, and many other Chinese firms with weak cashflows are cutting or suspending dividends, just like their global peers.
If direct stock picking is too risky, funds are an option, both managed or passive.
In terms of investment trusts, Stifel’s analysts were positive on the Aberdeen Asian Income (LON:AAIF) and Schroder Oriental Income (LON:SOI) investment trusts, both still down around 20% since the start of the year and looking “cheap”.
“Both funds have long track records of annual dividend increases and have significant revenue reserves which should help protect their payouts.”
Another option is Henderson Far East Income (LON:HFEL), though as its share price has held up much better, it is trading at a premium to net assets again and, said Stifel, “looks expensive compared to the peers”.
Fidelity China Special Situations (LSE:FCSS) is just one of two investment trusts that focus purely on China and is still remembered by many investors for its highly volatile start after being launched by Anthony Bolton in 2010, and although it is not an income-focused fund does pay a very reasonable dividend.
There's also JPMorgan China Growth & Income (LON:JCGI), where despite the name the dividend is lower than its China-focused rival.
FCSS current trades at a 10% discount to NAV and JCGI at around 5%.
For ETF investors, options include the iShares Asia Pacific Dividend (LON:IAPD), Vanguard’s FTSE Asia ex Japan High Dividend Yield Index or Xtrackers MSCI World High Dividend Yield (LON:XDWY).