Historically, investors have sought out Asian stocks for their growth potential and largely ignored their dividends. Yet Asian stock dividends accounted for two-thirds of the total return of the MSCI AC Asia Pacific ex Japan Index between 2005 and the beginning of 2016, according to one study. If the contribution made by reinvesting dividends were excluded, the cumulative return over the period would have been only 25%, where it was 71% if the dividends were included.

The notion that Asian companies scrimp on dividends or don’t pay them at all is quickly falling by the wayside, according to Yu Zhang, who manages the Matthews Asia Dividend Fund with Robert Horrocks and a team of three analysts and one co-manager. “Asian companies are a meaningful dividend player on the global stage alongside developed markets,” he says. “Corporate governance practices have been improving in Asia over the last few years, and an increasing emphasis on shareholder returns via dividend increases reflects that.”

The favorable dividend policies are also a reflection of the business ownership structures in Asia. Many companies are family-owned concerns in which the original founders continue to retain controlling stakes, and many wish to extract corporate cash flow through dividends. The prevalence of family-owned businesses in the region is one reason more than 40% of the Matthews fund is in mid- and small-cap stocks, which aren’t a typical space for dividends in the U.S.

“Dividends align the interests of minority and majority shareholders quite well,” says Zhang. “Everyone is getting paid equally according to how much they own in a company.” Dividends are also important to state-owned enterprises in countries such as China, he adds, since they provide an important source of government funding.

Investors have a number of reasons to consider adding dividend-paying stocks to the mix. Like their U.S. counterparts, Asia’s dividend payers typically exhibit lower volatility than other stocks and volatility is many Asian markets can surge out of nowhere. Asian dividend payers also add an element of diversification to portfolios. Dividend growth has been more robust in Asia than other parts of the world, and the region’s dividend-paying universe has expanded dramatically over the last 15 years to include a broad set of countries and sectors.

Asian stocks have a slight yield advantage over U.S. stocks. As of June 30, the Matthews fund’s benchmark MSCI AC Asia Pacific Index had a 2.40% dividend yield, while the S&P 500’s was only 2.02%.

More important, says Zhang, Asian stocks also have better potential for long-term dividend growth for a number of reasons. From a short-term perspective, earnings growth among Asian companies has picked up since late 2016, reversing a three-year trend of deflation and earnings declines for many companies. Asian companies have weaned themselves from debt, and many are less leveraged than those in the United States. And of course, the broader Asia growth story and rise of the consumer class is still very much part of the investment picture.

Equity valuations among these companies are also more attractive than they are in the U.S., even after a slew of positive earnings surprises among Asian companies sent their stocks soaring at the beginning of the year. During the first six months of the year alone, the fund was up 19%.

The recent foray by investors back into Asian markets hasn’t pushed valuations to unattractive levels, says Zhang. In the U.S., markets have already built earnings expectations into stock prices and valuations are at historically high levels. By contrast, Asia’s markets “are trading around the midpoint of their historic valuations.” And many parts of Asia are in the earlier stages of economic recovery than the U.S. is, he says.

He acknowledges that the region faces volatility in the months ahead due to threats from North Korea and Donald Trump’s vocal support of protectionist trade policies, as well as other political uncertainties. But he would also see any resulting dips as buying opportunities. “At the end of the day, what matters is company-specific, long-term fundamental drivers,” he says.

The fund’s total return strategy maintains an equal focus on both dividend yield and the growth potential of the underlying dividends. That makes it somewhat different from many of its peers, which focus almost exclusively on yield and contain hefty helpings of bank and commodity stocks.

About half of the portfolio is invested in names with stable high-dividend payouts and high dividend yields. These usually large-cap companies have more defensive businesses; they may have passed their prime growth stage, but they offer stable dividend income streams. With such stable plays in place, Zhang fills the rest of the portfolio with stocks whose underlying businesses are growing at a faster pace, even if they have more modest current dividend yields. There are just 64 stocks in the portfolio, and the turnover is a modest 40%.

There are no set parameters about how long a company must be paying dividends or yield levels, although most have a consistent history of dividend payment. “There are times when we will invest in a company without such a history if it has recently listed publicly,” he says. “But we will first make sure the company has strong cash flow, a solid balance sheet and management that is committed to paying dividends.”

Nor does the fund hew strictly to its benchmark on country or sector allocations. China represents the most overweight country position while Japan is underweight. Australia, where the banks and materials sectors have excessive exposure to both internal and external shocks, is also underweight relative to the benchmark.

The most heavily overweight sectors are consumer staples and consumer discretionary, which Zhang favors because they have better pricing power, better cash flow and lower capital requirements than industrials and other sectors. On the other hand, the fund is light on technology stocks because the Asian companies in the sector typically don’t pay dividends. More familiar internet-related names that are almost a fixture in foreign and international funds, such as Alibaba, have valuations that are stretched beyond his comfort level.

One of the more challenging aspects of Zhang’s job is ferreting out information about management’s willingness to share the bounties of a strong business with shareholders. That’s not always easy, particularly in businesses where a family maintains the majority stake.

To get to the bottom of things, Zhang speaks directly to majority shareholders (often in Mandarin Chinese, his native language) to get a better sense about their motivations. “We like to see a situation where the bulk of a controlling shareholder’s wealth is tied up in the listed company and they need to extract cash flow from dividends,” he says. “Having a formal dividend policy in place is also a good sign.”

Not all companies pass the dividend smell test. Despite improvements in disclosure requirements and corporate governance practices over the last few years, some Asian companies don’t act in the best interests of minority shareholders. In what Zhang calls a “bad connected party transaction,” for example, majority shareholders might use money raised in a public offering to buy up their other private, unlisted businesses rather than pay dividends.

Zhang and Horrocks have done a credible job of ferreting out the more attractive and reliable dividend payers in the region, noted Morningstar analyst William Samuel Rocco in a report earlier this year. “In particular, they focus on companies with clear dividend policies and commitments to growing their dividends, and they readily build atypical country and sector weightings and invest in small caps. ... This fund moderates downside risk (owing to the resiliency of dividend payers) while retaining significant upside potential (thanks to its various distinctive traits).”

Stocks falling into the large-cap, steady dividend group include longtime holding ThaiBev, one of Asia’s leading producers and distributors of alcoholic beverages. Family members own about two-thirds of listed shares, which are valued at around $17 billion. Zhang likes the company because its alcohol business provides a steady stream of revenue regardless of economic conditions, and it has both a strong dividend policy and a well-planned growth strategy.

Holdings with a growthier bent that pay lower dividends include China Gas Holdings, which builds pipelines and sells natural gas to residential, industrial and commercial users. With capital-intensive expansion plans winding down, China Gas is well prepared to generate more cash and increase its dividend. Another dividend grower, Minth Group, is the fund’s largest holding. Zhang began buying the stock of the China auto parts manufacturer in 2008, when the market crash brought the price down to half of book value. Since then, the company has offset slower sales growth in China with sales to automobile manufacturers in Japan, Europe and the U.S. Earnings for the company, which has a $5 billion market capitalization, have grown an average of 20% over the last five years.

CapitaLand, a large-cap real estate company in Singapore that was added to the fund earlier this year, has about three-quarters of its total assets in recurring income-generating properties such as office buildings, shopping malls, listed real estate investment trusts, serviced apartments and fund management businesses. The more volatile property development business accounts for only about one-quarter of CapitaLand’s total assets. This strategically sound business mix paves the way for more stable cash flow and potentially higher dividends.