Kate Lin: Welcome to Morningstar. As interest rates are expected to grind lower into 2024, market conversations are slowly moving from which banks offer the most attractive cash yield to how investors should deploy this pile of cash into next year. Stocks that pay dividends can be something investors can consider to capture the total return from these quality businesses. Samuel Lo from the manager research team at Morningstar is here to tell us about equity dividend funds.
The Return Profile of Dividend-Paying Stocks
So Sam, Asia on an index level may have been driven by outperformers like India and Japan. When it comes to Asian stocks' dividend record for the year, how did that impact the performances of your coverage of equity dividend funds?
Samuel Lo: The market continued to be very volatile this year in the Asia Pacific ex-Japan region, most notably driven by interest rate hikes across many of the largest markets in the world and also rising economic uncertainty globally. So against this backdrop, the dividend stocks have outperformed the broader market year to date through November, as they have over the past two calendar years in 2021 and 2022, and they have also recorded smaller volatility.
In general, dividend stocks tend to be less volatile as the dividends provide a more stable component of return, even when the market is turbulent. But that being said, dividend stocks may lag behind in more bullish environments, such as during the strong market rally of 2020. Over the long run, say on a 10-year basis, Asia Pacific ex-Japan dividend stocks have performed in line with the broader market but with lower volatility.
Dividend Cows and Growers
Lin: So portfolio managers in this space typically invest in two different types of dividend stocks: dividend cows and dividend growers. They have different characteristics. And are there any preferences in their allocation that you have seen?
Lo: That's a very interesting question. So traditionally when people think about dividend or income investing, they're thinking about stocks with high dividend yield, but that is only one part of the whole picture. So, in addition to stocks with high and stable dividends, which are typically referred to as dividend cows, portfolio managers often also look at companies which can grow their dividends over the long run, even though their dividend yield may not be high as of right now.
The benefit of having both types of stocks in the portfolio is that while dividend cows provide a stable stream of income return, dividend growers can potentially provide price appreciation upside. And also dividend cows tend to perform better in bear markets, while dividend growers typically do better in bull markets. So they can complement each other and help maintain portfolio stability over the market cycle.
Two Best Equity Income Fund Ideas
Lin: So lastly, do you have any high conviction equity dividend funds that you can share with us?
Lo: Let me discuss two of our best ideas here.
The first one is the Schroder ISF Asian Equity Yield, which has a Morningstar Medalist Rating of Silver, with both People and Process ratings at High. The strategy is managed by King Fuei Lee, who we believe is one of the strongest portfolio managers in this space. The strategy aims to deliver total return with lower volatility, and that has been achieved over the long run.
The portfolio itself consists of dividend cows and dividend growers in equal proportions, which reduces volatility as they complement each other over the market cycle. And moreover, Lee also looks for what he calls dividend surprises stocks, which he expects to provide further upside when they are re-rated by the market as they improve their capital allocation and shareholder returns. These typically account for around 20% of the portfolio, and Lee tries to identify as many of these as possible.
Next, I'd like to also share with you the Bronze-rated JPMorgan Asian Equity Dividend Fund. Both of its People and Process ratings are at Above Average.
This strategy is currently managed by Jeffrey Roskell, Julie Ho, and Ruben Lienhard. Roskell is the lead manager here, although he'll be retiring in early 2024. And, Julie Ho and Ruben Leinhard will then become the co-leads. The two of them are very experienced and have worked together alongside Roskell as co-managers for more than seven years.
The strategy balances the search for attractive yield with capital appreciation. It targets a forward dividend yield for the overall portfolio that is 30% higher than the benchmark. To achieve this, the portfolio has historically focused on investing in value and low-beta stocks. And three years ago, it also added a third bucket of quality and reasonable yield stocks to help enhance performance over the market cycle by reducing stylistic headwinds in more growth-oriented environments.
Lin: Wonderful. Thank you so much, Sam. For Morningstar, I'm Kate Lin.
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