Investors are looking to emerging markets for income as more companies are paying dividends than in developed markets, according to new research.
Emerging markets have also shown a robust dividend payout ratio over the past five years, say Sophia Whitbread and Jason Pidcock, who are co-managing a new emerging market income fund for Newton that launches in September.
“There is a much greater hunger for income than there has been in the past,” says Whitbread. “With a low return world in which we find ourselves. 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.
“More dividend-paying companies in emerging markets is a sign these companies understand investors are seeking income as well as capital gains, and also an indicator of challenges faced by many companies in the developed world in generating dividends when they have higher debt burdens, older workforces and lower growth potential.”
The pair explain that Asia is not the only place to look for investments that pay an income – as opportunities have been identified in South Africa and Brazil
“South Africa is interesting in that it displays characteristics of both the developed and the developing world,” said Whitbread.
“It boasts companies with 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.
“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 cash flows while maintaining low levels of debt.”