The global economy feels particularly chaotic these days. China is still navigating the fallout from Evergrande, and global supply chain issues continue to impact many sectors. A chip shortage has been particularly pernicious, and the pandemic is still not over. AIIMS Director Dr. Randeep Guleria said in a video that, “If we look at the global scenario, increasing cases are being reported in many parts of the world.”
Investors may feel skittish about the parts of their portfolio tied up in emerging markets, given the seemingly endless drumbeat of vexing news. But the truth is that funds like the SmartETFs Asia Pacific Dividend Builder ETF (ADIV) are showing that Asia is still a great place to find dividend growth.
Will the Chip Shortage Eat My Dividends?
At first blush, this is a reasonable concern. It seems like companies will need to invest capital to expand operations. When you add the fact that 2020 saw many companies take a hit to their bottom lines, it certainly feels rational to conclude that rather than increasing dividends, companies will need to balance their books or invest capital in expanding operations.
Fortunately, the chip shortage has improved a lot of company’s bottom lines enough that they have the capacity to both increase their dividends and make the necessary capital investments to meet global demand. Manufacturing has been at capacity, but profits have gone up along with prices. Taiwan Semiconductor, a holding of ADIV, is expected to see revenue grow 24.20% above 2021 levels next year.
Additionally, companies are seeking to put out “catch-up” dividends to make up for lower hauls from 2020.
Isn’t Investing in Asia Risky Right Now?
It is easy to be spooked by things like Evergrande, but the reality is that Asia continues to be a growing source of international income. Technology manufacturers are throwing off quite a bit of cash, and Asian companies are increasingly serving a regional market. So even with supply chain woes making things murky, profit growth is still anticipated.
ADIV also invests in companies that have been around for a long time. The fund focuses on quality companies with solid fundamentals and consistent track records of growth over time. These are exactly the types of companies that are built for macroeconomic moments like this current one.
Emerging markets are known for rapid growth but lower income potential. However, Asia has become an established region, which means that income is expected to start increasing. Given the lower floor of that income, the dividend growth story is likely to have quite a happy conclusion for investors.
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