Many high-yielding UK stocks have recently had to cut their “too good to be true” dividends – most notably mining companies hit by falling commodity prices. But if you’re looking for income, there is still plenty of opportunity beyond the UK’s blue-chip companies, says Maike Currie in the Financial Times – you just have to look overseas. “You’ll find Asia leads the pack when it comes to offering the income investor’s Holy Grail: income and growth.”
There are 165 companies in the Asia-Pacific region (excluding Japan) that offer both a forecast dividend yield of above 4% and forecast earnings-per-share growth of about 10%, according to Liontrust Asset Managers. This compares to 33 companies in the UK, 62 in continental Europe and two in Japan – only America beats Asia, with 174.
This potential can be put down to several factors, including Chinese companies’ growing willingness to return cash to shareholders; new government tax policies in South Korea that are intended to discourage the country’s family-run conglomerates from hoarding cash; and Singapore’s attractively valued real estate investment trusts, which offer yields of 6%-7%.
Despite the promise, the region is certainly not without risks, especially in places such as China, which “clearly cannot continue at the double-digit growth of recent years”. Investors may suffer from “short-term hiccups” across the region as a whole. The key is to look for companies “with middling yields expected to grow over time”, suggests Currie, rather than simply focusing on the highest-yielding stocks where dividends may not be reliable (good advice for any dividend investor).
There are a number of specialist Asian income funds available to UK investors. One of the most interesting is Aberdeen Asian Income investment trust (LSE: AAIF), which yields more than 5% and trades on a discount to net asset value of 8.2%, compared to a premium over the past ten years of 0.7%. It has performed disappointingly over the last three years, but has a good long-term record and shows recent signs of improvement.