Two Asian Dividend Plays

04/21/2010 1:00 pm EST

Focus: FUNDS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Benjamin Shepherd, associate editor of Personal Finance, finds two funds that invest in dividend-paying companies in fast-growing Asia and Australia.

Even as Western companies were slashing payouts [last year], many Asian outfits were enacting new dividend policies to attract fresh investment.

That trend has paid off: Matthews Asia Dividend (MAPIX)—formerly Matthews Asia Pacific Equity Income—has generated a total return of 35.8%, a large portion of which has come in the form of quarterly checks.

Lead manager Jesper Madsen continues to focus on cash-generating groups such as telecoms, utilities, and health care. He’s overweight in all three relative to the MSCI All Country Asia Pacific Index. Madsen is significantly underweight financials, a sector that would have significantly boosted the fund’s yield. It would also [have added] to volatility.

Madsen’s selections reflect a bias toward value and dividend sustainability. The fund’s average price-to-earnings, price-to-sales and price-to-book ratios are all lower than the benchmark MSCI index. He also keeps a close eye on payout ratios; the average for the portfolio is about 60%. The average yield is 5.6%.

Western investors are accustomed to receiving four payouts a year, a rhythm driven by the quarterly earnings cycle. Of Matthews Asia Dividend’s 63 holdings, only a handful—most of which have significant operations in the west—pay out on a quarterly basis. Most Asian dividend-payers make distributions on a semiannual basis, in line with their own reporting cycle.

Telecoms, which pay semiannual dividends, have come to dominate the fund’s top ten holdings. This group accounts for 25% of the portfolio. In the past, there have been more quarterly payers in the top ten, which smoothed out the fund’s distributions.

The fund is on track to generate a total yield of around 5% this year, and I’m optimistic about an upside surprise. Based on the strong results most of the underlying businesses are reporting, distribution increases during the year are likely.

Matthews Asia Dividend is a Buy at current prices. WisdomTree Pacific ex-Japan Equity Income (NYSEArca: DNH) is a solid exchange traded fund (ETF) that offers similar exposure.

This fund reflects a broader cross-section of the region’s dividend-paying stocks and is weighted toward total annual cash dividends paid. The result is basically an Australian financials fund: 81.6% of assets are devoted to the country, 46% to the sector. These allocations entail no undue risk—Australia’s financial sector is strong, and the currency is tied to commodities.

And though the Land Down Under has experienced its own property boom, its banks didn’t lever up to the extent their American peers did.

The fund is, however, more volatile than Matthews Asia Dividend and bears a lower yield at 3.1%. Because it is a passively managed ETF, it carries a much lower expense ratio—0.58%—than Matthews’ 1.3%.

WisdomTree Pacific ex-Japan Equity Income is a Buy up to $59 for investors with an appetite for risk. (It closed near $59.50 Tuesday—Editor.)

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