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By Jason Stipp | 07-20-2010 01:12 PM

Foster: Asia Stands Out for Income Growth

Andrew Foster of Analyst Pick Matthews Asian Growth & Income says Asia-stock dividends are picking up steam but may be volatile due to currency effects.

Jason Stipp: I'm Jason Stipp for Morningstar. We're in San Francisco visiting Matthews Asia Funds, and I'm here with Andrew Foster. He's a manager on Matthews Asian Growth and Income Fund. He's going to tell us a little bit about what he's seeing in his stomping grounds and where he's seeing some areas of opportunity. Andrew, thanks for joining me.

Andrew Foster: Thank you, Jason.

Stipp: I'd like to start out with a question on the income focus of your fund. You look for dividend-paying stocks at good valuations, you will sometimes invest in preferred stocks. I think in the past, you've held convertible bonds and some other bonds in the Asian markets.

This is an area of interest to our readers, because in the U.S., there is a lot of problems potentially for fixed-income investors. Low yields, potentially higher rates in the future. I wanted to get your take on what the income situation is like in Asia right now? What the credit quality and the dividend stability and how you are seeing the income situation compared perhaps to what you're seeing in the United States?

Foster: Well, I think, overall, I'd say the landscape in Asia for income is attractive. I caution investors that turning to Asia for income is not an outright panacea. So, it's a bit of a mixed bag. Let me explain that for a moment.

I think first and foremost, I'd say that the yields in Asia from a dividend perspective are reasonably attractive at this juncture. If you are looking at Asia-Pacific as a whole, there is about a 2.7% yield on average from stocks. It's a little over 3% if you throw Japan out of the equation, where yields tends to be a little bit lower still, which is not too bad in comparison to the U.S., which I believe is around 2%, maybe slightly above 2% at present. So that's a fairly attractive picture.

And also, I would say that the pool of dividends is quite large in aggregate. Asia is churning out well over $200 billion a year in dividends, which is on par with that of the U.S. S&P 500. So, Asia's – I would say that the pool of income available is sizable enough to merit investors' attention. It can generate income for investors over the long term.

I think there are some important caveats, too. I would say those evaluations figures I've given you are right about in line with historical averages, maybe even little below historical averages, and therefore not especially attractive at this juncture. And I would also say that currency risk is something that investors, I'm worried, are increasingly not paying attention to. They sort of assume tacitly that Asian currencies are deeply undervalued and that may be true over the longest horizons, but a lot of Asian currencies are quite fragile and between here and the long run, there may be a lot of volatility in between.

So, banking on getting dividends denominated in foreign currencies may not be a sure fire thing if you're looking for stable income, but growing income is different story. I think that's where Asia really stands out, getting back to the positive side of this. We've seen dividend growth rates in Asia really pick up steam and they've been growing in the mid-teens over the last several years, except for the '08-'09 period, where we did see a decline of about 15% in the pool of dividends. That's actually better than the U.S. as far as our estimates are concerned. The U.S. cut dividends a little bit more. So you've got dividend security, dividend growth and reasonable yields.

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