Traditional sources of income have become increasingly anaemic in recent times. Deposit rates have been slashed to kick-start economic growth. If you can get a 4% yield FD, you better not hesitate another time, but the fact is there is none now. While rental yields have been squeezed down to the valley bottom, there is hardly a property that can gives a 7-8% rental yield based on the current prices of the property market. As Government bond yield remain depressed in many countries, investor are turning to a surprising asset class to provide income - Asia Pacific equities.
Asian companies have not been noted historically for their corporate governance or focus on shareholder return. As a very broad generalization, dynamic growth and fierce competition in many sectors has led to growth for its own sake in recent decades. Market share mattered more than return on equity or efficient capital management.
The Asian Crisis of 1997 - 1998 literally crushed many over-leveraged businesses and provided a harsh lesson to those that survived. The capital destruction that marked the rise of some industries in Asia - where technology companies bought golf courses and start-ups owned corporate jets has become increasingly rare instead, managers are increasingly focused on more efficient and productive deployment of capital. This has seen corporate net dent across Asia Pacific (excluding Japan) fall by 2/3 to less than 20%, whist maintaining a strong, consistent return on equity. This is a painful lesson that other regions are only now starting to learn while for Asia over this time, the relative and absolute levels of dividend distributions have continued to rise.
There are 2 elements underpinning a company's dividend policy - the ability to pay and the willingness to pay. Lowered debt and strong earnings provide the ability to pay. We are also seeing an increased willingness to pay as companies embrace the culture of dividends.
There have always been the traditional pockets of yield within the region in sectors such as telecommunications and utilities. These areas have limited growth prospects, depending on the country, and have returned a significant portion of their cash flows to the investor. However we are seeing dramatic changes right now in sources of dividend yield. Some larger Korean and Taiwanese technology companies, having survived the 2001 crash and established a solid market share, are now returning value through dividends.
Looking across the globe at the moment, Asia Pacific offers a dividend yield in excess of most developed market. Chinese companies have started to embrace the dividend paying culture and it is expected that further opportunities will come in the future (etc. Maxwell). The Indian market is still slim in term of dividends but if this changes, the opportunities are immense. There are some areas which do have a comparable yield, but not one which offers Asia's combination or better growth, better demographics and better balance sheets.