Since last year, the market's attention to dividend stock investment has gradually increased, some people regard it as a hedging strategy, and some people regard it as a quasi-fixed income strategy, but these are not dividend investments as we understand them. In recent exchanges with investors, there are two questions that have attracted a lot of attention: first, how long can this style last? Second, even if you get a good dividend return, the actual total assets may shrink due to the decline in stock prices, how can the effectiveness of this strategy be reflected? Here are some of my thoughts on dividend stock investment.
First of all, our dividend strategy is to hold high-dividend stocks for a long time to earn dividends and dividend reinvestment value, that is, we hope that the selected dividend stocks can still have good long-term returns even when the stock price does not rise or fall. This underlying logic can take us away from questions like "How long will the bonus style last?". We have never relied on our judgment of the subsequent trend of the sector (we are not good at such judgments), nor do we rely on the rise and fall of the stock price to affect the judgment of the company's fundamentals. Our investment research framework is committed to the analysis of the company's business model and competitive advantages, to find those companies that can really make money in the long run, and buy at a reasonable and preferably low price.
A dividend strategy that takes earning the value of dividends as the source of income must be a long-term strategy, and the core is to use dividends to reinvest to hold more high-quality net assets, so as to improve the long-term dividend return of the portfolio. There are three key criteria for us to select investment targets: first, long-term stable operating profit (good ROE), second, continuous dividend ability and willingness to pay dividends, and third, low valuation, all three are indispensable. In the investment operation, we will make reasonable adjustments and rebalance of positions according to the actual situation. If the stock price rises significantly, it will inevitably reduce the dividend yield and dividend reinvestment yield, so we can sell the stock and cash in the stock price gains, and if the stock price remains unchanged or falls, we can also obtain a lot of long-term income through dividend reinvestment.
For example, the initial dividend per share of company A is 0.212 yuan, EPS is 1.22 yuan, assuming that the ROE (13%) and dividend rate (20%) remain unchanged, and the annual dividend is all used to buy stocks, with an initial principal of 10,000 yuan and a holding period of 20 years. Under the assumptions of the following 3 stock price scenarios, we will find that investing in the target has a good return on total assets in the long run:
After 20 years, although the stock price of the falling assumption is only 1.79 yuan, and the rising hypothetical stock price is 13.27 yuan, the total assets at the end of the period of the falling assumption are more than the rising assumption. Because under the premise of high ROE and low valuation, the decline in stock prices ultimately leads to extremely high dividend yields and dividend reinvestment returns, which is why Warren Buffett said that people who eat burgers every day do not want burgers to go up. Of course, the examples are simple assumptions (the actual valuation cannot be so low as the EPS rises year after year), but it can be understood that the long-term profitability of an investment does not depend on the rise in the stock price.
While it is impossible to answer how long the market for dividend stocks will last, what we can be sure of is that the market only affects short-term product performance, not long-term holder returns. As of January 22, 2024, the price-to-earnings (TTM) ratio of the CSI Dividend Index (000922.CSI) is 5.9 times, which is at the historical quantile of 11.5%, and the price-to-book ratio is 0.65 times, which is at the historical quantile of 5.9%. The valuation of dividend stocks is still in the lower range of the historical quantile, and the high-quality targets we have screened out in a bottom-up "weighing" way are likely to still have a good long-term return on investment.
From the perspective of value investment, the fundamental difference between growth stocks and dividend stock investment is the allocation of corporate earnings reinvestment, growth stocks are the company's independent reinvestment of its own earnings, while dividend stocks are the company's partial surplus to investors in the form of dividends, so that investors have more reinvestment options. At present, many targets have entered the higher dividend yield range, but short-term high dividends do not mean long-term high returns, and the value is defined by the long-term dividend discount value, not by spot dividends. In a volatile market, in-depth research and diligent tracking are the source of our determination and patience, and we also dynamically evaluate and adjust our positions to avoid value traps.
All roads lead to Rome, and maybe dividend investing can be your favorite, but don't just because it's been a tailwind lately.
About author:Tao Wang, M.S., Shanghai Jiao Tong University. Since 2018, he has been a researcher in the research department of Zhongtai Securities (Shanghai) Asset Management Co., Ltd., and is currently a fund manager in the equity public investment department.
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