The creation of Pan Asia Dividend Aristocrat index by S&P is a realization that Asian economy (specifically emerging markets) will continue to grow. This is a step in right direction to recognize managements who are prudent in their cash management over a longer term of 10 years and more.

The newly created S&P Pan Asia Dividend Aristocrats consists of 31 corporations. Of these 31 corporations, only five companies are from emerging markets of China, Taiwan, and India. Many readers will view this lack of dividend growth in emerging markets (including India) as shot in the arm saying dividends does not provide significant return. My viewpoint is different. The chart, I presented earlier shows that dividends provide approximately one third of the total returns over 10+ years.

The lack of consistent dividend growth companies in emerging markets can be interpreted in different ways

1. Emerging economies need very dollar to invest back in their businesses. The cost of external capital is typically higher, and hence it is advisable to use internal resources. Shareholders can get their return by capital appreciation on their share values.
2. The managements are not mature enough to understand the importance of common shareholders, or sharing a piece of profits with shareholders, and/or prudent cash management over longer term.
3. The taxation policies which do not favor dividend distributions.

I believe most of the corporations in emerging markets are personality driven, and lack any institutional management philosophy. The corporations are primarily driven by personal aspirations (both, good and bad), and as a result the shareholders have miniscule holdings (and contributions). I cannot recall any instance where majority shareholders (other than family and friends) or banking institutions that have been able to make any change. And hence, this has a part in driving the dividend strategies. Common shareholders have such a small percentage holdings that they always remain in back burner.

There are approximately 400 companies in India that have at least paid dividends for last 10 years. However, they have not been growing consistently. Furthermore, the dividend strategies also hinge upon governments taxation policy and cost of available capital. I believe as that as Indian economy grows and competition increases, the cost of capital will come down, and taxation policy will evolve slowly towards friendlier dividends. As of today, at least the dividends are tax free for individuals.

Every dividend paying company is not a good investment. Individual investors need to be prudent in the choice of companies when investing for dividends. Among others, the dividend investor will need to understand management’s philosophy vis-à-vis dividends, its free cash flow, debt levels, and long term competitive position in the market.

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