In these times of low interest rates and volatile share markets, investors keep coming back to dividend stocks. A near inescapable market logic drives this. Low interest rates make returns on high-grade bonds unattractive. In fact, once inflation is factored in, the returns are typically negative and the bonds risk losing value when interest rates rise. Equities are appealing but risky.
Dividend stocks, however, generally return above inflation, and offer equity returns should the share market go on an extended rally.
For those reasons Hong Kong investors have been piling into local dividend stocks, such as real estate investment trusts (yielding about 5.4 per cent) Hong Kong banks (about 3.6 per cent), and power firms such as CLP (3.9 per cent) and Power Assets (3.5 per cent).
However, if you are a dividend fan, another class of stock deserves a closer look: mainland toll-road companies. These pay out an average dividend yield of about 6.5 per cent (see table) and offer a chance of gains should the mainland economy turn around.
Toll roads are typically safe earners, if dull and low growth. They collect cash in a highly predictable fashion. This stability enables firms to pay out a high proportion of their earnings in the form of dividends. It also allows the companies to obtain cheaper debt financing (banks and bond investors see them as a safe bet for repayment), enhancing returns.
Mainland toll-road firms are exposed to volatile mainland economic growth, and are therefore seen to be more volatile. But this could be taken as a positive. Mainland toll-road stocks were down this year as economic growth slowed. Should the economy rebound, so might the stocks.
