Asian equities offer an attractive alternative for the dividend-seeking investor in 2022. They provide diversification benefits and an attractive dividend yield, among others.
Global equity markets rallied during the COVID-19 pandemic on the back of unprecedented monetary and fiscal support. Governments and central banks did everything in their power and more to support economies and households during the most challenging health crisis of our time.
As a result, investors reacted to the low-interest-rate environment by buying equities. Therefore, equity markets bounced from their initial lows at the pandemic's start and rallied hard.
Now that central banks in the developed world are preparing to tighten the monetary policy (i.e., the Federal Reserve of the United States is forecast to lift the federal funds rate next March), what alternatives exist for the global investor in search of dividend income?
Asian equities offer attractive dividend yields, diversification benefits, and lower dividend payout ratios. Moreover, the economic growth in the region is forecast to exceed the growth rate in the rest of the world.
Attractive dividend yields
Dividend yields reflect how much an investor gets back for each dollar invested in a company. It is calculated as the annual dividend yield divided by the price per share, and the higher the yield, the better.
A too high dividend yield should raise some questions. By paying too much to shareholders, the company forgoes the opportunity cost of investing the money to expand the business.
However, higher dividend yields offered by Asian equities refer to the entire region, not one particular company. As such, companies in the Pacific ex. Japan region offer much higher yields when compared to the rest of the world.
Diversification is the process of investing in companies uncorrelated with the rest of the portfolio. Or, better said, the lower the correlation degree between the investments, the bigger the diversification benefits.
Why would anyone diversify the portfolio? Diversified portfolios whether declines much better, and Asian equities are less correlated to those in the developed world.
Lower dividend payout ratios
A lower dividend payout ratio implies that the company has a buffer to use in times of need. Asian equities have lower dividend payout ratios which offer them flexibility in an economic downturn.
Higher economic growth in the region
Finally, the region's real GDP growth is forecast at 4.5% annually for the next five years. This is a much higher growth rate when compared to the world's real GDP over the same period, seen just shy below 3%.