Income-seeking investors may want to investigate Asia, where improving corporate governance and fast-growing earnings are helping to drive dividend growth despite the prevailing negative sentiment towards emerging markets.

Dividends from companies across the Asia Pacific region leapt 15.9% to a record £222.6bn over the past 12 months. That compares with average dividend growth across the rest of the world of just 5.5%.

ASIAN INCOME GROWTH

Research from the Henderson Far East Income (HFEL) trust shows the Asia Pacific region now accounts for one pound in every six paid out in dividends worldwide. At the same time, regions which have been more traditional hunting grounds for pay outs are seeing their dividends dwindle – in 2009 the US accounted for one pound in every 10 paid out to shareholders in the world, but this fell to one pound in 12 last year.

Meanwhile, the annual value of dividends in Asia Pacific has more than tripled over the past decade. Between 2009 and July 2018, firms in the region paid out a total of £1.3tn to shareholders.

Brian Dennehy, director at FundExpert, explains: ‘Asia is home to vast, growing middle class populations, countries with lower debt levels and innovative companies with the potential to hugely increase productivity. By 2030, a quarter of Europeans will be over 65 but only 12.5% of Asians.

‘That represents an extraordinary global rebalancing, which will drive company profits and dividends for decades to come.’

ASIA OVERLOOKED BY INCOME INVESTORS

Despite the statistics, however, few investors would think of Asia as an area for income. The region is best-known for its fast-growing economies and innovative tech companies. Only around £4bn is invested in Asian income funds compared to a hefty £61.5bn held by investors in UK Equity Income funds.

But there may be a valid reason for that disparity: dividend pay outs ratios (the proportion of its profits a company gives back to shareholders) are still comparatively low in Asia, so although dividends are rising rapidly this is from a low base.

Indeed, only half a dozen Asia focused funds yield more than 4%. Chief among them is the Schroder Asian Income Maximiser (B581S49) fund, which yields 7.2%, however this uses derivatives to boost its pay outs, which some investors might not be comfortable with. The standard version of the fund, Schroder Asian Income (B559X85), yields 3.9%.

Portfolio manager Rupert Rucker says: ‘When people think about Asia they think of high-growth areas such as China and India, but there are more mature economies in the region such as Australia, Hong Kong and Singapore where the companies are incredibly stable and have been paying dividends for more than 50 years.’

RISING TREND SET TO CONTINUE

Investors in the region are confident the upward trend in dividends will continue, so now may be a good point of entry while the market is still relatively cheap.

Sat Duhra, portfolio manager of Janus Henderson Horizon Asian Dividend Income (B1JPCL7), says companies have record levels of cash on their balance sheets, are seeing capital expenditure fall and foreign investment increase. At the same time, reforms in the region are encouraging companies to start rewarding their shareholders.

‘The energy, materials and financials sectors have been very strong, paying out dividends way above our expectations,’ he explains. The fund, which yields 5.6%, has around a quarter of its assets in Chinese firms, with further investments in Australia and South Korea. Top holdings include China Construction Bank, commodities giant BHP Billiton (BLT) (also listed in the UK), and chemical company Sinopec.

Mike Kerley, manager of Henderson Far East Income trust, expects the record breaking in the region to continue – he is forecasting underlying dividend growth of almost 11% over the next 12 months. He says: ‘The Asia Pacific region is more than just a crucible of investment and growth, enticing investor interested in capital gains. As economies have developed and companies have matured, it is now a huge income-generating machine too.’

TAIWAN AND SOUTH KOREA SEE FASTEST GROWTH

Taiwan and South Korea have seen the fastest dividend growth, with pay outs up almost 150% since 2013. Kerley says chemical companies, whose pay outs have increased seven-fold, have been leading the way, with growth also coming from the banking and technology sectors and firms that are benefiting from a boom in consumer goods manufacturing.

For investors considering the region, Dennehy particularly likes the Liontrust Asia Income (B7BZB32) fund as a good option for combining income – currently it yields 4.8% - and capital growth. “Reinvesting the income provides a fantastic kicker,” he points out.

He also likes Newton Asian Income (B8KT2R3), which has been particularly strong in navigating the effects of trade war threats and anticipating problems in the Chinese banking sector. The fund yields 4.4%.

Dennehy adds: ‘There are some great UK equity income funds doing a fantastic job of growing their dividends consistently, but investors should not forget that there is a whole world of income opportunities that they can benefit from.’ (HB)

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