There are now more dividend-paying companies in the emerging markets than there are in developed markets, says Newton’s Sophia Whitbread
The dividend pay-out ratio in emerging markets has proved to be remarkably stable over the past five years
Investment opportunities abound, not only in Asia but also the likes of Brazil and South Africa.
“There is a much greater hunger for income than there has been in the past,” says Whitbread, “owing to the low return world in which we find ourselves. Indeed, today’s low nominal return environment and ageing populations in many developed countries continue to fuel the demand for real income-generating assets – especially as the yields on offer from other traditional income-generating assets, such as property and bonds, currently look so muted.
“There are now more dividend-paying companies in the emerging markets than there are in developed markets; an indication that companies in such markets understand investors’ regard for dividends as well as from capital gains, and also a sign of the challenges faced by many companies in the developed world in generating dividends given higher debt burdens, older workforces and lower growth potential, among other factors.
“Furthermore, the dividend pay-out ratio in emerging markets has proved to be remarkably stable over the past five years, despite significant market volatility, the global financial crisis and the impact of currency fluctuations,” she adds.
“While some have viewed Asia as the home of a number of the emerging world’s high-quality, dividend-paying companies, there are also plenty of investment opportunities to be found outside the region, in markets such as South Africa and Brazil,” she explains.
“South Africa is interesting in that it displays characteristics of both the developed and the developing world. It boasts companies with highly experienced management teams, which match the standard of those in developed markets, but with greater exposure to the attractive growth opportunities available in emerging markets.
“We are particularly interested in the financial, healthcare and consumer sectors, where companies are meeting the increasing demands of a growing middle class. Furthermore, longer term demographic growth trends suggest a significant growth opportunity across the African continent, with the UN forecasting the Sub-Saharan population to double by 2030.
“With regards to dividends, South African companies are generally conservative when it comes to debt; this may relate to concerns around the volatility of the rand, inflation and interest rates historically. As a result, they tend to generate higher cashflows while maintaining low levels of debt.
“Meanwhile, Brazil is also well positioned to benefit from a youthful population and a growing middle class, with increasing disposable incomes.”
She continues, “We are particularly interested in the development of infrastructure across the country, in particular with regard to transport ahead of the World Cup in 2014 and the Olympics in Rio in 2016. President Dilma Rousseff recognises that private investment should play an important role in infrastructure improvement, with some potentially attractive investment opportunities on offer for investors.
“With regard to dividend yields, Brazilian companies listed on the local exchange, BM&FBovespa, are required to maintain a minimum 25% pay-out ratio. This has led to an established dividend culture among the local corporates, with the BM&FBovespa currently yielding over 4%,” she adds.
6 August 2012