Investor lessons from around the World.

paulren's picture

On global investing and the long record around the importance of high cash dividend yields.

One of the biggest disappointments on investing in emerging markets in the past several years comes from none other then the largest and fastest growing of them all, China.

Since its June 2001 peak, the Shanghai composite index has fallen by 44%. Thereby dishing out some of the worst of both: high volatility along with negative overall returns.  And this, despite the Chinese economy growing some 9.2% in real terms for many years already, one of the world fastest growing economies by any means!

What happened to the long acclaimed "go for growth investment strategy"?

Forget GDP growth. What counts most in emerging markets, as in other markets, are dividends and the expected growth rates in those dividends.  Regardless what Thai or other brokers around the world tell you, dividends more then anything in fact matter most!

Painstaking research by Elroy Dimson, Paul March and Mark Staunton all of the London Business Schools sheds a great deal of light* on this nebulous "go for growth investment strategy".   They compiled data for 53 stock markets, and, for 17 of these markets, the data span a long 105-year period. What is the conclusion?  They found no statistically significant link between previous GDP growth rates and investor returns. In fact high cash dividends, more than anything else, is what matter most.

So what is the dividend record on China’s Shanghai composite index?  A miserable current yield of only around 1.1%, and future dividend prospects are not good either. Even Zhou Xiaochuan, the governor of the People’s Bank of China, complained last December "05, about the puny dividends being paid in China. (Incidentally, the long average dividend yield record in the US is not much better).

So there you have it, yet once again as the many smaller cap Thai shares, pay on average almost double the Thai stock market dividend yield average of 4%, itself a high global average.  Here are leading growth companies with often little financial leverage, paying tax favored 5-10% in annual cash dividends. No wonder they have been, unquestionably, among the world best investments and this for many years already.

For years I have here written on the far superior investor strategy around focusing on high dividends and low valuations, rather then just share liquidity and or top down investor strategies.

Best Regards,

Paul A. Renaud.

*  See Forbes Asia, Magazine Feb 27 "06, page 63.