Asian Equity ETFs for Income Investors

Want a sustainable source of income? Companies in Asia are managing to grow their dividend payouts at the same rate as their US and UK counterparts

Dimitar Boyadzhiev 26 November, 2015 | 2:20PM
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This article is part of Morningstar’s Guide to Investing in Asia where we navigate the potential risks for the chance of fantastic rewards from across the region.

Dividends are a crucial driver of long-term equity returns; nearly a third of the returns of the MSCI World Index over the past 20 years have been contributed by the compounding feature of equity dividends.

The annualised dividend growth of companies in Asia from 2009 to 2014 was 9.6%, on par with the US and Europe

In the US and Europe, many large companies pursue a progressive dividend policy, meaning that delivering stable and consistent dividend growth is amongst their primary objectives. In the Asia Pacific region this corporate practice is not as entrenched. However, the data shows that dividend sustainability is similar across all regions.

According to S&P, the annualised dividend growth of companies in the Asia Pacific region from 2009 to 2014 was 9.6%, broadly at par with their US and European peers. Moreover, the aggregate dividend pay-out ratio – the proportion of earnings paid to shareholders in dividends – in Asia Pacific is only second to the US.

Irrespective of the varying dividend growth policies, the fact remains that companies that demonstrate an ability to raise dividends through challenging conditions usually offer strong competitive advantages in their sectors. Examples of these companies in the Asia Pacific region include Infosys, India’s biggest technology consulting company, and Coca-Cola Amatil, a large bottler company operating mainly in Australia, New Zealand and Indonesia.

This upper echelon of dividend paying companies may be seen by investors as providing a relatively safe entry point into unfamiliar geographies. However, they are risk-free investments. Investors considering dividend-growing companies may need to stomach short-term volatility; although over the long-term they should benefit an increasing dividend income stream.

Passive Funds to Provide Diversified Income

The process of screening for companies with consistent dividend-growth policies is challenging. European investors seeking direct access to the Asia Pacific region also have to contend with higher trading execution costs.

This is where ETFs come in handy. The task of screening for the companies is effectively undertaken by the indices, while the ETF themselves deal with the intricacies of putting the portfolio in place. At this stage, there are two ETFs in the European marketplace that offer access to this strategy with a focus in the Asia Pacific region.

The SPDR Pan Asia Dividend Aristocrats ETF (PADV) tracks an index that focuses on companies that have increased dividends every year for at least seven consecutive years. This ETF uses physical replication, distributes dividends semi-annually and carries an ongoing charge of 0.55%. As we write, the index holds approximately 60 stocks.

The top country exposure is Japan making up approximately one-third for the portfolio followed by Australia and China with 17-20% each. The top sector is financials at around 20%, followed by consumer staples another 20%, and health care at 15%.

The db x-trackers MSCI AC Asia ex-Japan High Dividend Yield (XAHG) tracks an index that selects from within a larger parent benchmark the stocks that have both higher dividend yield and quality characteristics. The portfolio is also screened to ensure that companies with deteriorating fundamentals that might cut their dividends are excluded.

This ETF uses synthetic replication, distributes dividends annually and carries an ongoing charge of 0.65%. As we write, the index has over 120 stocks, with top country exposures being China at 35%, Hong Kong and Singapore, both 15-20%. The portfolio is heavily tilted towards financials, accounting for nearly half of its weight, followed by telecommunications and energy.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Dimitar Boyadzhiev  is a Passive Strategies Research Analyst for Morningstar