Now is the Time to Buy Chinese Dividend Stocks

Many Chinese stocks are down due to declining economic growth in the country and concerns about corporate governance. But with its economy still expanding at a more impressive rate than investors seem to credit, the People's Republic's publicly-traded companies should still prosper in the future. Here's why dividend-paying Chinese stocks' combination of capital gains and steady income streams could reward shareholders with an impressive total return.

Plenty of purchasing power
While the rate of Chinese economic growth is falling, it still exceeds 7% annually. China has the largest foreign reserves, is the biggest exporter, and has the highest domestic savings rate in the world. These factors all give the country enormous potential.

By contrast, Europe remains mired in a recession, with falling economic growth. Japan's enduring the 23rd year of the island nation's "Lost Decade." And, with U.S. economic growth under 2%, our own economy's still struggling. The gloomy economic outlook for these countries could hinder the growth of both the share price and dividend yields of its companies.

In terms of overall financial strength, China now has the world's largest economy in terms of purchasing power, according to Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics. That is a sturdy foundation for Chinese dividend-paying companies to grow.

The due diligence of dividends
While too many publicly-traded Chinese companies were frauds, Jesper Madsen, manager of Asian income mutual funds for Matthews International Capital Management, points out that none of the offending firms paid a dividend. According to Madsen, the income feature of any stock provides a layer of security for investors, and demonstrates solid management and a respect for the rights of all shareholders, particularly individuals. And, according to the Motley Fool, "There's no better indicator of a financially secure company than a long history of paying dividends to shareholders." 

Potent payouts at tempting prices
Many Chinese stocks are selling at very attractive valuations, as investors are wary of the entire sector. China Mobile (CHL), the world's largest mobile phone company in terms of subscribers, sells at a discount to competitors such as Verizon (VZ -2.99%), Vodafone (NYSE: VOD), Mobile Telesystems (MBT), and AT&T (T -0.89%). China Mobile's far more responsible payout ratio makes its dividend more sustainable than its peers from around the world.

Source: Motley Fool CAPs and Finviz

Many other publicly-traded Chinese companies pay robust dividends with healthy financial indicators. Like China Mobile, the companies are in very solid industries with valuations that are attractive.

PetroChina (PTR)is a major oil company, with a market cap of around $240 billion and a net profit margin almost one-third better than the industry average, while still trading at a higher price-to-earnings ratio. Yanzhou Coal Mining (YZC 1.41%) has a five-year net profit margin of 26.40%, when the industry average is just 18.80%. The dividend yield, earnings-per-share growth rate, and sales growth rate for Guanshen Railway (GSH) exceeds the industry average.

Source: Motley Fool CAPS and Finviz.
*Industry Average in Brackets

The Time is Now
In a world of weak economic growth and anemic interest rates, many Chinese stocks' attractive dividend yields and alluring valuations make them more appealing for Foolish investors. If I had to pick just one, I'd look more closely at China Mobile, which remains attractive despite its 16.86% rise this year.

It's impossible to time the market. But it's never a bad time to buy stocks at attractive prices with appealing dividends, particularly from a country with the expanding economic power of China.