Jeremy Glaser: There are a ton of options out there, so it looks like you have slices of differing sectors, different regions across the entire market capitalization.
How do you narrow it down into companies that are going to have a solid dividend and might not just be paying out for the sake of it or recklessly?
Jesper Madsen: The way we look at it from a portfolio perspective, because obviously 5,000 companies, that's a large universe to work with, so we narrow it down quite quickly, actually.
There are certain business models that we as bottom-up investors would tend to focus on. At Matthews, what we tend to tilt all our portfolios on, what we focus on, is what takes place in Asia for the Asian households.
We're not overly intrigued or interested in the exporting sector, again, because what are you doing? You're tying yourself back to the U.S. Diversification is lost by going to the exporting sectors. Even though they have great exporters obviously in Asia, it's not as interesting as looking at more of the structural and longer-term trend of the rising household wealth.
We look at the company level for strong cash flows, these cash flows growing in excess of capital needed to reinvest into the business. That gives you free cash flow that can then be paid out as dividends.
We look at very strong balance sheets. Again, for the most part Asia is very under-geared. They went through the Asian crisis back in the late '90s, and that has basically scarred I would say management teams and made them somewhat conservative, sometimes overly conservative, about keeping cash on the balance sheets and keeping pretty light balance sheets.
But it does mean for shareholders that now you don't have the banks first in line. You actually are now first in line to that growth and cash flow.
So obviously we look for companies that have, I would say, a competitive advantage, and that oftentimes would be represented in higher return on equity, higher return on assets, higher margins, and so on and so forth.
We obviously focus on the companies that have a sound dividend policy. We don't obviously want to have companies that necessarily are paying out all their earnings because that puts some cap on their growth, both of the company longer term and perhaps also in terms of the dividend growth that we see. We look for companies for the most part with a moderate payout, but again that can grow with that business as that grows as well.
Glaser: Sounds like a pretty similar set of criteria that you'd use when you're evaluating domestic stock for dividend yield.
Are there any maybe caveats that individual investors in the United States need to think about in terms of taxation or in terms of the frequency of the dividend that would be a different experience abroad than it would be in the United States?
Madsen: Yes. From a taxation perspective, withholding taxes will obviously vary from country to country. Besides that, we have what be a qualified dividend and a non qualified dividend.
There are certain countries in Asia that would not have a tax treaty, for instance, with the US, and dividends paid from those countries would be considered non qualified. So that's obviously one taxation issue.
Now there are certain ways that we can get around that, sometimes with buying an ADR, for instance, of a company that normally would be listed from those countries with no tax treaty.
We try to, as much as we can, we don't manage through the taxation, but obviously if we can, all things being equal, avoid having a dividend be non-qualified, we will try and do so.