In the past two years, the dividend index has significantly outperformed other broad-based indices, and dividend assets have become one of the focus of market attention. Is there still an opportunity for the direction of dividends in the future, and how can active equity investment surpass the CSI Dividend Index? Today, we invite Fan Jingwei, fund manager of the Stable Income Investment Department of Penghua Fund, to clarify the core logic of dividend investment from the current macro environment, historical experience, investment logic and methods.
The new trend of the "three lows" macro environment
In the past two years, both bond and equity investment have encountered great challenges.
From the perspective of the bond market, the yield to maturity of 10-year Treasury bonds of 2.5% has always been a support level, whether it is the 2008 financial crisis, the overcapacity in 2015-2016, or the new crown epidemic in 2020, it is ultimately a counter-cyclical policy force to reverse the trend of interest rates. However, the yield on 10-year Treasury bonds to maturity in 2024 has basically broken through the support level of 2.5% and is now at 2.3%, and the trade has entered no man's land.
From the perspective of the stock market, the two-standard deviation of the stock return spread has always been an important indicator for analyzing the price performance of stocks and bonds, but since last year, this indicator has begun to fail. Exploring the reasons behind this, we believe that with the increase in economic volume, the decline in the potential growth rate of the economy is one of the main reasons, but more importantly, the upper-level policy consideration period has shifted from the GDP target to the dilution of economic aggregates, the adjustment of economic structure, and the pursuit of high-quality development. Under the idea of high-quality development, risk prevention and structural adjustment have become the top priorities. In such a policy environment, we believe that the probability of strong stimulus policies as a whole is decreasing, and the cyclical nature of the economy and industries will be significantly weakened.
At the same time, we are currently in a downward cycle of real estate, and if there is no adjustment of counter-cyclical policies, it is difficult to rely on the manufacturing industry to hold up the cycle. Therefore, historical data shows that China's inventory cycle is the real estate cycle. If China is in a period of transition and enters the stage of deleveraging in the next few years, the inventory cycle will be significantly weakened, and at the same time, the motivation of households and enterprises to actively increase leverage will be weak, and the central government is also tightening fiscal discipline and strictly controlling local debt, we believe that the economy may be in a stage of low growth and inelasticity for a long time, and the cyclical nature will be significantly weakened.
It's time to invest in dividends
This leads us to think about what changes need to occur in the investment strategy if we are in the "three lows" macro environment of low interest rates, low growth and low inflation in the future.
Referring to Japan's historical experience, since the 90s of the last century, Japan's economic growth began to decline, residents entered a long period of deleveraging, due to the lack of effective demand, the overall price is also very low, and interest rates have started a bull market. After the 90s, due to a series of problems such as economic growth shifts, liquidity traps and asset price bubbles, Japan's stock market risk appetite has obviously shifted to stocks that focus on ROE, cash flow and higher dividend yields. Therefore, from the 90s to 2012, Japan's high dividend index was dominant for a long time.
On the other hand, in China, if the time dimension is extended, the domestic dividend index has shown a good compound interest return even in the period of rapid economic growth, and since 2005, the CSI dividend return has far outperformed the medium and long-term pure bond index. Therefore, dividend investment is not a unique investment concept in this era, but the performance in the past two years has been excellent, and the advantages have been amplified by the market.
Another question of concern is whether the dividend index is currently in a bubble after three consecutive years of outperformance, and the dividend static dividend yield and the ratio to the 10-year Treasury bond are still at an all-time high, so we do not believe that there is a bubble overall.
Introducing dynamic dividend yields and upgrading dividend investments
In fact, constructing a dividend strategy based on a static dividend rate will face two problems: first, a high dividend yield does not mean that it is willing to pay dividends, it may simply be because the valuation is cheap, and second, high dividends in the past do not mean that they will be sustainable in the future. Therefore, there are two "pitfalls" to avoid when choosing a high dividend: 1) the undervaluation trap (low valuations and low dividend yields), and 2) the cyclical trap (high fluctuations in earnings/cash flows that cause dividends to fluctuate cyclically). For example, the allocation ratio of traditional dividend indices in strong cyclical industries (coal, steel, real estate) is maintained at about 30%, and the downward cycle will bring about a systematic correction in earnings and valuations, and the losses caused by dividend yields are far from being compensated for.
Therefore, when we invest in dividend yields, we consider two factors. First, the static dividend yield level can obtain dividends steadily, which is related to the unique business models of some industries and companies, which have a certain period of immunity, and at the same time have stable valuations, earnings and dividends.
Second, the concept of dynamic dividend yield is introduced, because the current static dividend yield of some companies in the market is not high, but after the subsequent big cycle, the pattern will slowly stabilize, and the pricing will gradually switch from growth to dividend yield. On the whole, the overall dividend payout ratio of A-shares is relatively low, and there is still a large gap between the continuity of dividends and the growth dimension of dividends. Because although the domestic economy is slowing down, it is still a growing economy as a whole, and the growth of listed companies is mainly used for investment expansion, and the willingness and ability to pay dividends are still different from those of developed countries. At the same time, since last year, the regulator has also been guiding listed companies to continue to pay dividends and increase the dividend ratio. In the future, with the economic slowdown and the decline in capital expenditure, the sustainability and growth rate of dividends of A-shares will usher in greater space. Therefore, the targets selected based on the dynamic dividend yield can contribute not only the dividend yield yield income of a steady state, but also the income of valuation improvement.
Based on the above analysis and thinking, we have re-arranged the product of Penghua Hongyi, positioned as an investment strategy of dividend enhancement and cyclical immunity, and selected industries and individual stocks with stable valuation, profitability and dividends. Welcome friends who are interested in dividend investment to pay more attention!
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