The best Asian markets for income investors

Good yields are not hard to find when you know where to look

Published on November 6, 2024

Asia is one of the few equity regions that can compete with the UK on yield
Where are funds reaching for yield?

UK investors are generally spoiled for choice when it comes to income. The 10-year UK Treasury still comes with a yield comfortably above 4 per cent and domestic shares can offer plenty too. Take a FTSE 100 ETF, which comes with a yield of around 3.8 per cent and the prospect of dividend growth, or individual shares, ranging from Reckitt Benckiser to NatWest, National Grid, Imperial Brands, Legal & General and Vodafone, all of which offer yields of 4 per cent at the very least.

And yet there are good reasons to look further afield, be it concerns that the majority of dividends are too tightly concentrated among a handful of companies in the FTSE 100, or that investors should simply remember the mantra of diversification. They may also welcome the opportunity to collect dividends from equity regions that also have good prospects for growth.

Much as it has been a rocky ride in recent years, Asia does stand out on both the growth and income front. For the former it still has strong demographics and the fact that economies such as India's seem to now be on the rise. For the latter, Asia has for some time competed even with the UK when it comes to dividend yield. An MSCI AC Asia ex Japan tracker may not yield as much as its FTSE 100 equivalent but Asian income funds are doing plenty of legwork on the income front. To give one broad example, the average fund in the AIC's Asia Pacific Equity Income sector comes with a yield just shy of 6 per cent, as of late October.

It's not all rosy. The Janus Henderson Global Dividend Index notes that the Asia Pacific ex Japan region saw dividends inch ahead by just 1.1 percentage points on an underlying basis in the second quarter of this year, "well behind the wider world", in part because a steep cut from shipping group Cosco offset increases elsewhere. However, Singapore, South Korea and Taiwan all saw double-digit growth, led by banks, motor manufacturers and TSMC, respectively, while areas such as Australia should see a pick-up in payouts in the third quarter.

A good yield can certainly be found in many places, and an income approach might suit an Asian equity portfolio well. Rob Morgan, chief analyst at Charles Stanley, notes that an equity income remit in Asia and the emerging markets more generally tends to leave investors with "a value-oriented portfolio that is more resilient in the tougher times". He adds: "Combined with the income generated, which can be high and is in no way a compromise for diversifiying into the region, it means a lower level of volatility."

Where does the yield come from?

Asian equity investors traditionally have to cope with a few countries having an outsized presence in the market. China accounts for around a third of the MSCI AC Asia ex Japan index alone, with India on 22.2 per cent, Taiwan on 20 per cent and South Korea on nearly 12 per cent. Those running portfolios also have to account for the fact that Taiwan Semiconductor Manufacturing now makes up more than 10 per cent of the index after a run of strong performance, meaning fund managers must decide whether they back the stock quite so heavily.

Dedicated Asian income funds do have to face up to these issues: of the five investment trusts in the AIC's Asia Pacific Equity Income sector, two names list Taiwan as their biggest geographic allocation, with TSMC showing up reasonably prominently.

Recent disclosures show TSMC making up 11.9 per cent of Abrdn Asian Income, 11.1 per cent of JPMorgan Asia Growth & Income and 10.7 per cent of Schroder Oriental Income. It also makes up 8.7 per cent of the Invesco Asia trust, but just 5.5 per cent of the Henderson Far East Income trust.

What's interesting here is that TSMC is a relatively low-yielding name, with a share price dividend yield in the region of 1.3 per cent. But having big positions here might prevent money managers from trailing the market too much, while providing some gains that can feed into a decent total return.

It's notable, however, that Asian income funds do tend to deviate from the market in other, important ways. The JPMorgan fund does have some geographic preferences similar to that of the underlying market, with roughly a third of the portfolio in China and a fifth in India. But all the other funds have less of an allocation to China than the index, with some notably low weightings to India, too.