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Investment value: steady progress, advance and retreat
Attention and policies are promoted together, and dividend investment welcomes development opportunities. In recent years, the leading performance of dividend products has brought high market attention, and the trend of capital inflow is obvious, with a net inflow of 15.6 billion yuan in dividend ETFs in 2023. Historically, the dividends of listed companies have had problems such as poor stability, low dividend levels and discontinuous dividends, which have been improved in recent years. With the further standardization and optimization of the policy on the cash dividends of listed companies, dividend investment is oriented to the layout of the soil.
In what market environment, the performance of dividend investment is superior? The formula for calculating dividend yield can be broken down into three parts: dividend, net profit and valuation, and we analyze the investment logic of dividend including stable cash flow, mature operation of enterprises and low valuation. For the performance of dividend investment, we believe that it is mainly affected by five aspects: 1) liquidity, 2) equity and bond spreads, 3) market environment, 4) stock and bond allocation, 5) congestion:
Product market: If the day is rising, dividend investment is promising
Dividend index investing is booming. As of the end of 2023, there are 41 products totaling 55 billion yuan, an increase of 1.5 times compared with 2020. Based on the difference in dividend indexes, we divide the existing products into five categories: broad-based dividends, low-volatility dividends, cross-border dividends, thematic dividends and dividend quality. Among them, broad-based dividend and dividend low-volatility index products are the largest, accounting for nearly 90% of the dividend index product market. From the perspective of tracking indices, the largest indexes to track include Dividend Index, CSI Dividend, Dividend Low Volatility 100, Dividend Low Volatility and SZSE Dividend Index.
From index compilation to position characteristics. We have sorted out the compilation methods of the tracking index of major dividend products, and explored the similarities and differences from the dimensions of sample stocks, sample stock screening, sample selection methods, weighting methods and periodic adjustments. Further, the index has the following position characteristics: 1) industry distribution: the industry distribution focuses on mature industries such as banking, coal, transportation, etc., and there are large differences between different indexes; 2) dividend level: the dividend level varies greatly between indices due to different market investment directions and sampling methods, and the dividend yield level is broad-based> dividend is low volatility > dividend quality; 3) index return: the index performance trend is similar, but there are still structural differences; 4) index risk: the dividend low volatility index has a strong historical ability to resist risks; 5) income sources:
Tailor-made, screening bonus active targets. As a result, the scale of the former has declined in recent years, while the scale of the latter has increased significantly, and many active equity funds have invested in dividend assets to express their market style views. These products mainly have the following characteristics: 1) dividend level: the dividend yield of ex-ante classified products varies from the dividend yield of ex-ante classified products, while the dividend yield of ex-post classified products fluctuates vertically; 2) industry distribution: the industry exposure differentiation among active funds is obvious, and there are large differences in industry concentration. If the active dividend fund is used as a fund pool, it deviates significantly from the CSI dividend index for growth industries;3) Source of income: Dismantling the income sources of active dividend funds in each quarter in the Brinson way, it is found
The Stone of Other Mountains, the Development and Enlightenment of Overseas Markets. The total size of U.S. dividend public funds in 2023 will exceed 1 trillion US dollars, and although the structure is dominated by active products, passive funds are developing more rapidly. For markets outside the United States, Taiwan, China's dividend products are the largest and growing rapidly. With the rise of inflation, in order to avoid asset depreciation, the concept of the Taiwan market has gradually shifted from "saving money" to "saving stocks". On the one hand, dividend products are relatively less volatile, and on the other hand, dividend index products have attracted high attention because "depositors" often expect to obtain stable dividend income to obtain fixed income. Coupled with the steady performance of the dividend index in the Taiwan market in recent years, the scale of dividend products has expanded rapidly. At the same time, we have sorted out the compilation method of the top 10 US indexes, which we believe will have reference significance for the domestic dividend index.
Product outlook: Investor profiling, value allocation and optimization opportunities
Who is buying dividend products? From the perspective of structural changes, dividend index products have attracted the attention of institutional investors. Based on our estimation of the ETF holding structure of various institutional investors, we find that compared with the institutional investor structure of dividend ETFs in the United States, investment advisors and private banks account for a relatively high proportion of them, and we believe that the development of such investors may become an important source of funds for dividend products in the future.
What is the value of dividends in asset allocation? For different styles of stocks, the correlation between dividend index and value style is higher, and the correlation with growth style is also lower, and the correlation with small-cap and micro-cap styles is also low. For different assets, the overall correlation between dividend assets and bond assets is negative, and the correlation with gold is also low. Based on the above characteristics, it is a straightforward idea to combine dividends and bonds to build a stable "fixed income +" portfolio. According to our calculations, the "fixed income + dividend" combination allocated in the ratio of 19 and 28 can effectively reduce risk and improve risk-adjusted returns.
What is the room for optimization of existing products? Funds that invest in dividends sometimes have problems such as relatively simple stock selection ideas, insufficient style prominence, and excessive industry exposure. We try to provide some optimization ideas based on these possible problems: 1) stock selection considerations: dividend stock screening can focus on the growth and volatility of individual stocks, and at the same time, we can also pay attention to the current less concerned capital flow and liquidity dimensions, especially the stocks with relatively low liquidity in the near future may be more able to enjoy the liquidity premium in the future; 2) weight frequency: valuation changes and dividend income often contribute to the main income of the dividend index, and increasing the rebalancing frequency of position orders may give higher dividends in the near future. 3) Industry optimization: Selecting and screening dividend portfolios based on dividend yield and other dimensions often leads to the exposure and concentration of some industries, and the long-term performance of the strategy may be improved after industry-neutral adjustment.
Overseas dividend products can be roughly divided into two types: high dividend strategy and dividend growth strategy, both of which have attracted high attention from the market. In the mainland market, the dividend growth strategy products are blank as a whole. We believe that in terms of how to construct a dividend growth strategy, we take the CSI 800 constituent stocks as a sample, select stocks according to dividend yield and dividend amount, and backtest the performance of the dividend growth strategy by weighting dividend yield, free float market capitalization and dividend amount.
Risk Warning: 1) In the process of fund management and operation, it may face market risks, management risks, technical risks, and redemption risks, which will affect the overall return level of the fund. 2) Past performance of fund products and fund managers is not indicative of future performance. 3) This report does not deal with the evaluation of securities investment funds.
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Investment value: steady progress, advance and retreat
Attention and policies are promoted together, and dividend investment welcomes development opportunities
The performance is good, and dividend investment is in the ascendant. Dividend investment is an investment strategy that captures a basket of stocks with high dividends, dividend growth and other characteristics that have certain characteristics in terms of dividend distribution, and has continued to increase in attention in recent years with the obvious excess of the relative market. In 2022 and 2023, the return of the CSI Dividend Total Return Index will be 19% and 12% higher than that of the CSI All Index Total Return Index, respectively. From the trend point of view, the trend of capital inflow into dividend ETFs is obvious, with nearly 15.6 billion yuan of funds flowing into dividend ETFs in 2023, and showing an accelerated inflow trend.
Chart: Since 2023, the net inflow of dividend ETF funds has been significant
Note: Data as of March 31, 2024
Source: Wind, CICC Research
The dividend situation has improved, and the dividend investment has been deployed in the soil. Historically, the dividends of listed companies have had problems such as poor stability, low dividend levels and discontinuous dividends, which have been improved in recent years. From the perspective of the company's dividends, the number of participating companies and the amount of dividends have both risen, and the number will rise to more than 3,500 in 2023, and the amount will increase to 2.14 trillion yuan, an increase of nearly 1 times compared with 5 years ago. In terms of continuity, the number of companies that have paid dividends for five consecutive years has also increased significantly, from nearly 500 in 2009 to more than 2,300, and the company's continuous dividends have been guaranteed. From the perspective of dividend investment, the improvement of dividend status has brought more optional targets on the one hand, and at the same time has ensured the effectiveness and stability of dividend investment, and dividend investment has ushered in development opportunities.
With the help of policies, dividend investment can be expected in the future. In December 2023, the China Securities Regulatory Commission (CSRC) issued and implemented the Regulatory Guidelines for Listed Companies No. 3 - Cash Dividends of Listed Companies (Revised in 2023) and other normative documents on cash dividends. The revision mainly includes strengthening institutional constraints, supervising dividends, and continuously guiding and improving the level of dividends. In April 2024, the State Council issued the Several Opinions on Strengthening Supervision and Preventing Risks and Promoting the High-quality Development of the Capital Market (hereinafter referred to as the "New Nine Articles"). Among them, it is clear that the dividend policy must be disclosed at the time of listing, and the pre-listing surprise "clearance" dividends and other situations will be included in the negative list for issuance and listing. At the same time, strengthen the supervision of cash dividends of listed companies to enhance the stability, sustainability and predictability of dividends. We believe that these policies will further standardize and optimize the dividend payment method, incentivize companies with moderate dividends, and improve the development space of dividend investment.
Chart: Development of the dividend system in mainland China
Source: Wind, CICC Research
In what market environment, dividend investment performance is superior?
What is the essence of dividend investment? We can break down the formula for calculating dividend yield into three parts: dividend, net profit and valuation. The investment logic of dividends can be analyzed in a nutshell, that is, stable cash flow, mature operation of the company and low valuation. 1) Stable cash flow: Dividend stocks are usually those companies with stable earnings, they usually have enough cash flow to pay dividends, and will try to maintain the stability of this payment;2) Mature operation: Choosing to return profits to shareholders in the form of dividends, rather than through capital appreciation or other means, often means that these companies have reached a certain stage of maturity and do not need too much capital for expansion, with high barriers;3) Lower valuations: According to the formula, other things being equal, the downward valuation can increase the dividend yield of individual stocks, and companies screened based on high dividends are often undervalued targets.
We will further explore the factors influencing the performance of dividend investments, and overall, we believe that they are mainly affected by five factors: market liquidity, risk appetite, dividend premium, market volatility and congestion.
There is a positive correlation between the interest rate of U.S. Treasury bonds and the excess performance of dividend assets. From a liquidity perspective, the 10-year Treasury yield is a positive indicator of the relative net value of dividend assets. When U.S. bond interest rates rise and fall, the performance of long-term and high-valuation assets that are more sensitive to interest rate changes tends to be suppressed, while dividend assets usually have stable cash flows, relatively short duration, and high dividend yield assets tend to have lower valuations, which are relatively more resistant to the impact of rising interest rates on asset prices. Specifically, from the second half of 2012 to 2013, from the second half of 2016 to 2018, and from 2020 to 2023, U.S. bond interest rates showed a clear upward trend. During the period, the overall performance of dividend assets was stronger than that of the CSI 300. Conversely, during periods of significant downturns in interest rates, assets with stronger growth and longer durations tend to outperform.
Chart: Relative net dividends are positively correlated with 10-year Treasury rates
Note: Data as of March 31, 2024
Source: Wind, CICC Research
Dividend assets performed strongly during the downturn in investors' risk appetite. We use the FED model to measure the spread between stocks and bonds (1/PE - 10-year Treasury bond yield, where PE uses the CSI 800 Index results), i.e., the risk premium of investing in the stock market relative to the bond market. When the spread between stocks and bonds rises, it indicates that investors' risk aversion increases. As discussed above, dividend assets tend to have stable cash flows, and companies are mostly in the mature stage, and during the upward risk premium, growth assets with higher elasticity tend not to be preferred, and the performance of dividend assets is relatively leading.
Chart: There is a positive correlation between the relative net value of dividends and the spread between stocks and bonds
Note: Data as of March 31, 2024
Source: Wind, CICC Research
A safe haven in volatile markets. During the market downturn, thanks to the company's maturity period, low valuation and other attributes, dividend assets tend to be more resistant to declines and less affected by fluctuations in the economic cycle. During the four major market downturns since 2010, the CSI Dividend Index and the CSI Dividend Low Volatility Index have mostly performed better than the stock market as a whole, especially since March 2021, the two indices have had higher gains, while the overall market represented by the CSI 300 has declined significantly.
Chart: The dividend index is relatively resilient during market downturns
Note: Data as of December 31, 2023
Source: Wind, CICC Research
Under the dividend yield premium, the attractiveness of dividend assets increases. As a dividend asset with both equity and debt properties, the attractiveness of dividend assets is enhanced when the dividend yield of the asset is higher than that of other investment options (such as bonds) because it can provide relatively high cash flow returns. With the decline in treasury bond yields in recent years and the increase in the dividend asset dividend level, the dividend yield of the dividend index has been higher than the treasury bond interest rate since 2018, and the difference between the two has gradually widened. So far in the second half of 2023, the dividend yield premium has remained at around 3%. High dividends and relatively stable trends have improved the cost-effectiveness of dividend asset allocation, which has become one of the reasons for the rapid inflow of funds in recent years.
Chart: Dividend yield premiums have increased significantly in recent years
Note: Data as of December 31, 2023
Source: Wind, CICC Research
In addition to the analysis of the macro environment, investors can also combine the detection of market congestion to grasp the pace of investment. In the report "Quantitative Fundamentals Series (15): How to Quantitatively Characterize Style Crowding: A Case Study of Dividends", we propose a way to measure the congestion of dividend investment, focusing on the congestion characteristics of overheating, trading convergence, and risk intensification, and screening five-dimensional observation indicators, including: yield, trading volume, transaction structure, valuation, and market sentiment. This congestion measure has a high probability of predicting the risk of a short-term downside in the market.
For metrics of these five dimensions, when the metric triggers the threshold of 95% of the quantile for the past year, the metric is recorded as 1, otherwise it is recorded as 0. Finally, the congestion indicators of the five dimensions will be added together to construct the market congestion score, and when the score is greater than 3, the signal of market congestion will be triggered.
Chart: The Market Congestion indicator signals the performance of the Dividend Index
Note: Data as of March 31, 2024
Source: Wind, CICC Research
Product market: If the day is rising, dividend investment is promising
In recent years, with the leading performance of dividend investment and the deepening of investor education, investors have gradually come into contact with dividends, understand dividend investment and truly start dividend investment. During this period, both active and passive Smart Beta funds have been developing rapidly and have become an investment tool that investors have widely paid attention to. In the following article, we will explain the market and characteristics of the relevant products separately.
Passive Indices: Dividend index investing is booming
Based on the market distribution, factor characteristics and thematic differences of dividend index investment, we divide the existing dividend index products into five categories: broad-based dividend, dividend low volatility, cross-border dividend, thematic dividend and dividend quality.
The scale of dividend index funds has risen significantly, and the scale of broad-based dividends and low-volatility dividend products is leading. As of the end of 2023, there are 41 products totaling 55 billion yuan, an increase of 1.5 times compared with 2020. Among them, broad-based dividend and dividend low-volatility index products are the largest, accounting for nearly 90% of the dividend index product market.
Chart: Changes in the size of various types of dividend index funds
Note: Data as of December 31, 2023
Source: Wind, CICC Research
We have sorted out the compilation methods of the main dividend product tracking indexes, and there are some commonalities and differences in the compilation schemes of these indexes, specifically:
► Source of sample stocks: The index mostly focuses on Shanghai and Shenzhen A-shares, and some indices are based on broad-based indices such as CSI 300 and SSE 180. In addition, some indices screen individual stocks based on a certain theme or cross-border market, which meets the needs of investors for differentiated style exposure.
► Sample stock screening: In addition to the general liquidity requirements, the dividend index generally has requirements for the continuity of individual stock dividends, such as continuous dividends in the past three years, and some indices set limits on the dividend payout ratio of individual stocks to avoid the impact of excessive dividend payout ratios on the growth of individual stocks.
► Sampling method: The index mostly screens sample stocks based on the size of the dividend yield, and selects the stocks with higher dividend yields. Some indices will consider a number of other factors, such as the S&P A Dividend Index that considers the earnings of individual stocks, the Dividend Low Volatility Index which also considers the volatility of individual stocks, and the Dividend Quality Index which considers the earnings quality of the index.
► Weighting method: The weighting method of the index varies depending on the objective and type of the index, for broad-based and thematic dividend products, dividend yield weighting is mostly used, and a few are weighted by free-float market capitalization, and for dividend low-volatility products, some indices include the factor of volatility in weighting, and the dividend quality index is mainly weighted by composite quality factors.
► Regular adjustment: Most indices adjust their constituents once or twice a year, and a few indices adjust their constituents on a quarterly basis. In addition to the adjustment of constituents, some indices will also rebalance and optimize the index based on the weighting of the index. Although a more frequent adjustment index can enhance the dividend attributes of the index, such as allowing the high-dividend yield target to obtain higher weight, it also increases the turnover rate and transaction cost of the index.
Chart: Compilation of major domestic dividend funds tracking indexes
Note: Data as of December 31, 2023
Source: Wind, CICC Research
The industry distribution focuses on mature industries such as banking, coal, and transportation, and there are large differences in different indices. In terms of industry distribution, the industry distribution of the dividend index is often relatively concentrated, and it is mainly concentrated in some industries. Most of the dividend indices are distributed in mature industries with a relatively stable competitive landscape, such as banking, coal, transportation, and power and utilities. Some indices have different industry distributions due to differences in how they are structured and invested in different markets. For example, the SZSE Dividend Index has a high deviation from the growth period industries such as food and beverage, home appliances, electronics and automobiles, and the dividend quality index has the highest allocation ratio in the pharmaceutical industry.
Chart: Industry distribution of major dividend indices in China
Note: Data as of March 31, 2024
Source: Wind, CICC Research
Dividend yield levels vary widely. The index dividend yield in the market is often calculated based on the ∑ cash dividend (TTM)/∑ stock market capitalization, but because the dividend index is often not based on market capitalization weighting, the impact weight of the larger market capitalization target in the calculation result is larger, and sometimes it cannot actually reflect the dividend yield of the portfolio, so we use it to reflect the dividend level of the portfolio side. In terms of results, there are large differences in dividend yields between different indices. However, on the whole, the dividend yield of the broad-based dividend index is relatively leading, except for the Shenzhen Stock Exchange Dividend Index, which is constrained by the Shenzhen Stock Exchange, which is mostly the target in the growth period, and the average dividend yield is relatively backward. Among the thematic dividends, the dividend yield of the CSI Central Enterprise Dividend and the CSI State-owned Enterprise Dividend Index is relatively high, while the dividend yield of the Consumer Dividend Index is relatively backward. Due to the comprehensive consideration of the dividend yield and volatility level of the underlying asset, the overall dividend yield of the low-volatility category is at the median level, but it is still significantly higher than that of the mainstream broad-based index. The dividend yield of the target in the Dividend Quality Index is relatively low.
Chart: Weighted dividend yields of major dividend indices over the years
Source: Wind, CICC Research
The performance of the indices is similar, but there are still structural differences. Due to the differences in the way different indices are compiled, the risk exposure is also emphasized, and there may be a clear differentiation in the performance of different indices during the same period. For example, in 2020, the performance of individual stocks with growth attributes and core asset targets led the performance, and the performance of the SZSE dividend, consumption dividend and dividend quality indexes, which take into account the growth and earnings quality styles, was relatively outstanding, while the performance of other dividend indices was not as good as that of mainstream broad-based indices such as the CSI 300. Judging from the trend trend in recent years, the performance of different types of dividend indices is relatively different, and there is a big difference between the overall performance and the performance of the broader market. Among the sub-categories, except for the SZSE Dividend Index, the other broad-based dividend indices are relatively similar, and the overall performance of the dividend low-volatility indices is relatively similar.
Chart: Calendar year returns of major dividend indices
Note: The data is as of 2024.3.31, and the data of each index uses the full return results
Source: Wind, CICC Research
Historically, the Dividend Low Volatility Index has a strong ability to resist risks. Looking back at the risk situation represented by the downward standard deviation and drawdown of each index over the years, on the whole, most dividend indices are less risky than mainstream broad-based indices. Among them, after the superposition of the low-volatility factor, the dividend low-volatility index generally has a relatively lower standard deviation and maximum drawdown. The risk indicators of SZSE Dividend, Consumption Dividend and Dividend Quality Index are relatively high.
Chart: Downward standard deviation and retracement of major dividend indices
Note: The data is as of 2024.3.31, and the data of each index uses the full return results
Source: Wind, CICC Research
For the return of the portfolio, we can often calculate it as follows:
where sum represents the closing and opening prices of asset i, respectively. Further, this equation can be translated into:
namely
Through the transformation of the formula, we can break down the income of dividend assets into three parts: dividend income, earnings growth and valuation change.
Dividends and low valuations are the main sources of income for dividend investments. From the perspective of the income sources of the major dividend indices in the past decade, valuation changes and dividend income have contributed most of the growth of most dividend indexes, while the contribution of earnings growth is relatively limited, such as dividend indexes, CSI dividends, CSI 300 dividends and most thematic dividend indices. Compared with the income sources of mainstream broad-based indexes, earnings growth is the mainstay, and there are big differences in the overall investment logic. However, there are still some structural differences between the indexes, for example, earnings growth accounts for the main contribution of the Shenzhen Stock Exchange dividend income, and the contribution of valuation changes in the dividend quality index is obviously negative. There is a large difference in the contribution of income sources among the dividend low volatility indexes, among which the dividend income contribution is the leading, the valuation change has a significant contribution to the dividend low volatility index, and the earnings growth has a greater impact on the performance of the Orient Stock Exchange dividend low volatility and 300 dividend LV index.
Chart: A breakdown of the main sources of dividend index income in the past decade
Note: Data as of December 31, 2023
Source: Wind, CICC Research
Active products: tailor-made, screening bonus active targets
Dividend products are screened in advance and ex post by method. For active equity funds[1], we use two methods to sort them out beforehand, as well as ex post categorization. Ex-ante classification is based on the screening of fund contract objectives, and the investment style of the fund based on this type of method is often relatively stable, while the ex-ante classification can be screened based on the characteristics of the fund's holdings, which can be used to express the fund manager's views on the relevant style. Specifically:
► Ex-ante classification: Screen active equity funds with keywords such as "dividends", "dividends" and "dividends" in their names, or funds that are benchmarked against dividend indexes.
► Ex-post classification: Select active equity funds with an average dividend yield () of not less than 4% in their holdings.
The scale of contract-based bonus products has declined, while position-based dividend products have increased significantly. From the perspective of the market situation of active dividend products, the scale of contract-based dividend products is significantly affected by the performance of the stock market, and there is a downward trend after rising to a high level at the end of 2020, which is more consistent with the overall scale of the active equity fund market. With the relative strength of the dividend market, many funds have invested in dividend assets to express their market views, and such funds have grown rapidly in both scale and quantity.
Chart: Changes in the size of active dividend products in recent years
Source: Wind, CICC Research
The dividend yield level of the ex-ante sub-category product holdings is mixed. According to the results of the dividend funds classified in advance, we have calculated the average dividends of the top 20 product holdings. On the whole, the average dividend yield difference between different holdings is more obvious, with the average dividend yield of most products below 4%, and only 4 products with an average dividend yield higher than 4%.
Dividend yields of ex-post classified products fluctuate vertically. Active equity funds that are classified after the fact tend to "vote with their feet" and express their views on the market based on changes in their holdings. Since there is no contractual constraint, the holding style may be adjusted, and it is not necessary to maintain the long-term dividend style exposure.
Active dividend funds are relatively different from growth sectors. If the active dividend fund is used as a fund pool, and the industry distribution of each period relative to the CSI dividend index is counted, we can get a glimpse of the views of active fund managers in the dividend market. In the short term, in addition to the consideration of dividends, active dividend funds tend to take into account the overall growth of the industry, with a leading proportion in the food and beverage, electronics, non-ferrous metals, computer and pharmaceutical industries, while there is a significant underallocation in the banking, steel and coal and other industries with weak long-term growth. The power equipment and new energy industries have a prominent overweight ratio from 2020 to 2022, and there will be a significant decline in 2023.
Chart: Sector deviation of active dividend fund by period - relative to CSI Dividend Index
Source: Wind, CICC Research
Both industry and stock selection are important sources of income. If we take the high dividend yield (average dividend yield >4%) fund as a sample for each period, the income sources of each quarterly active dividend fund are broken down in the Brinson method. It can be observed that since 2018, asset allocation and individual stock selection have been the main sources of income for active dividend funds. Among them, the income of asset allocation fluctuates relatively largely, while the income of individual stock selection is relatively continuous.
Chart: Breakdown of Brinson's revenue sources for each quarter
Source: Wind, CICC Research
Overseas Markets: Stones from Other Mountains, Overseas Market Development and Enlightenment
The size of the U.S. dividend index fund is growing rapidly. Statistics on the changes in the size of active and passive dividend funds in the United States, among which, the active dividend funds in the United States are obtained by screening products with keywords such as "Dividend" and "Income" in the name and benchmarked by the dividend index. Since 2008, the U.S. dividend fund has developed rapidly. As of the end of 2023, the total size of dividend public funds exceeded US$1 trillion, and although the structure is dominated by active products, passive funds have developed more rapidly. In the U.S. Smart Beta Fund, thanks to the U.S. concept of prudent investment after 2008, the proportion of dividend investment has increased rapidly, and has stabilized at more than 20% in recent years.
Chart: Changes in the size of U.S. dividend equity funds
Source: Morningstar, CICC Research
Taiwan, Ireland, Canada and Japan lead the way in dividend investment. For overseas markets outside the United States, Taiwan, China's dividend products are the largest, with a total of US$27.3 billion at the end of 2023, and the growth is rapid, more than double the scale of the previous year. In addition, the Irish, Canadian and Japanese markets also lead the way in dividend index funds.
Among them, the development of dividend products in the Taiwan market has reference significance. With the rise of inflation, in order to avoid asset depreciation, the concept of the Taiwan market has gradually shifted from "saving money" to "saving stocks". On the one hand, dividend products are relatively less volatile, and on the other hand, dividend index products have attracted high attention because "depositors" often expect to obtain stable dividend income to obtain fixed income. Coupled with the steady performance of the dividend index in the Taiwan market in recent years, the scale of dividend products has expanded rapidly. As of the end of 2023, 4 of the top 10 dividend index funds in markets outside the United States are products from Taiwan.
Chart: Changes in the size of dividend index funds outside the U.S
Source: Morningstar, CICC Research
The weighting methods are abundant, and the dividend growth strategy has attracted attention. Counting the size of the index tracked by US index funds, the S&P US Dividend Growers, FTSE High Dividend Yield, and DJ US Dividend 100 indices have a large tracking scale, and as of the end of 2023, the three account for only 55% of the index fund market. At the same time, we have sorted out the compilation methods of the top 10 indexes in the United States, and the main enlightenment for the domestic dividend index is as follows: 1) the weighting method of the top three indexes is free float market capitalization, in addition, there are dividend yield, total dividends and equal weighted products; 2) there are various ways to express dividends, in addition to products with high dividends as a strategy, the top indices also adopt the "dividend growth strategy" 3) In terms of weight restrictions, there are many restrictions on the weight of industries and individual shares to prevent excessive risk exposure in specific targets or industries; 4) The weight rebalancing frequency is abundant, although the index is mostly adjusted annually, it can also be rebalanced at a higher frequency to correct the index style, such as quarterly frequency and monthly frequency.
Chart: U.S. Top 10 Dividend Indices by Tracking Size
Note: Data as of December 31, 2023
Source: Official websites of each index company, CICC Research Department
Product outlook: Investor profiling, value allocation and optimization opportunities
Who is buying bonus products?
Investor portrait of a dividend index fund. In the statistical process of ETF investor structure, since feeder funds are regarded as institutional investors, and there are differences between the customer groups of ETF feeder funds and ETF funds, we will exclude the holdings of ETF feeder funds to completely restore the actual distribution of ETF investors. From the perspective of structural changes, dividend index products have attracted the attention of institutional investors. Whether it is ETFs or over-the-counter index funds & LOFs, the proportion of institutional investors has increased significantly since 2022 and has risen to a record high at the end of 2023. Among them, for the ETF market, the proportion of institutional investors in dividend ETFs was lower than that of equity ETFs as a whole, and has risen to a similar level by the end of 2023, while for the OTC index fund & LOF market, the proportion of institutional investors in dividend products has been higher than the average level of equity products for a long time.
Chart: Comparison of the proportion of institutional investors in ETFs in recent years
Source: Wind, CICC Research
Insurers bring in major incremental funds. In 2023, the scale of dividend index funds has grown rapidly, and we have calculated the changes in the holding structure of various institutional investors based on the top 10 holders disclosed by ETFs. It was found that among them, insurers have brought major scale increments since 2022. In our view, as dividend funds typically invest in stable, established companies, these companies generally have stable earnings and cash flows. For insurance companies, on the one hand, this investment option is relatively low-risk, which is in line with their long-term and stable investment strategy. On the other hand, dividends paid on a regular basis are also a reliable source of income for insurance companies, which can be used to pay insurance claims or increase the insurance company's cash reserves. At the same time, the long-term growth target of dividend investment and the characteristics of asset diversification to reduce portfolio risk are also in line with the asset allocation needs of insurance companies, and promote the allocation of dividend products in insurance capital holdings.
Chart: Dividend ETF Institutional Investor Holding Scale
Source: Wind, CICC Research
What is the value of dividends on the asset allocation side?
The correlation between dividends and growth style targets is low. In terms of correlation with different styles of stocks, the correlation between dividend index and value style is high, mainly because when defining value style, the valuation and dividend level of the relevant underlying are mostly considered, which is similar to the characteristics of dividend funds. At the same time, because high-dividend stocks are often in the mature stage, the overlap with growth stocks is low, and the correlation between the two is also low. Overall, dividends also have a low correlation with small-cap and micro-cap styles.
Bonds have a negative correlation with the performance of the dividend target. For different asset types, the correlation between dividend assets and bond assets is negative, especially with the China Bond-Composite Wealth Index, while the correlation with gold assets is low.
Chart: Correlation matrix between dividends and different assets
Source: Wind, CICC Research
Based on the negative correlation between dividends and bond trends and the overall stable performance of the two, it is a direct idea to combine the two to construct a relatively stable "fixed income +" portfolio. We construct a portfolio of stocks and bonds between the CSI Dividend Index, the Dividend Low Volatility Index and the China Bond-Composite Index according to the method of 10% dividend + 90% bond and 20% dividend + 80% bond, and backtest the portfolio performance.
The "fixed income + dividend" combination effectively reduces risk and improves risk-adjusted returns. Based on the data from 2010 to 2024Q1, after adding dividend assets to the bond asset allocation in proportion, the asset curve of the asset portfolio is significantly more stable than the original dividend asset curve, the fluctuation of the yield curve is significantly reduced, and the drawdown is also greatly narrowed. Similarly, the Sharpe ratio and Calmar ratio of the "Fixed Income + Dividend" portfolio have improved significantly, and the return of assets has increased under unit risk.
Chart: Dividend index and bond asset allocation performance
Note: The data is as of March 31, 2024, and the unit is 100 million yuan
Source: Wind, CICC Research
What are the optimization and layout opportunities of bonus products?
According to the above statistics, we found that funds that invest in dividends sometimes have problems such as relatively simple stock selection ideas, insufficient style, and excessive industry exposure. In order to try to solve some of the problems and optimize the performance of the product, we discuss the optimization method of dividend products from the perspectives of stock selection considerations, weight adjustment and industry optimization, so as to provide some ideas for product improvement.
Stock Selection Considerations
The effectiveness of growth factors and low-wave factors was better. In order to explore the effective bond selection indicators in dividend stock selection, we conducted quarterly IC validity tests on fundamentals and price and volume factors within the scope of CSI dividends. Overall, the growth and low-volatility factors performed well in the CSI dividend range. For example, among the growth factors, the operating income growth factor and the operating income growth performance stability factor both have higher IC mean and ICIR results, and among the volatility factors, the standard deviation of the upper and lower shadows and the upward volatility factor also perform better. Therefore, in the selection of dividend stocks, we can pay attention to the growth of individual stocks and the volatility level of recent performance.
Pay attention to the flow and liquidity of the underlying funds. In addition to the more common growth and low volatility factors, we have found that we can also pay more attention to the flow and liquidity of the underlying funds. In terms of capital flow, the change in the proportion of northbound holdings and the change in the level of capital flow at the opening are positively correlated with the future quarterly performance of individual stocks. In terms of liquidity, dividend stocks with a low turnover rate in the near future may have better performance in the future, and due to the long-term nature of dividend investment, they can enjoy a liquidity premium.
Chart: Effectiveness performance of neutral factors in the CSI dividend stock pool
Note: As of 2024-03-29;
Source: Wind, CICC Research
Weight frequency adjustment
The weight adjustment highlights the bonus style. As mentioned earlier, in addition to dividend yields, valuation changes also make a major contribution to most dividend indices. That is, for the dividend index, how to stably and effectively express the dividend style is very important. Referring to the compilation method of overseas dividend indexes, the frequency of index rebalancing is often higher than that of mainland China, and the weight of index constituents is mostly adjusted based on quarterly frequency. This method gives higher weight to stocks with higher recent dividends and relatively low valuations, which may optimize the characteristics of high dividends and low valuations.
Taking the CSI Dividend Index as an example, the index was regularly adjusted in December. We rebalance the weights of the constituents on a quarterly basis based on each period of the constituent stocks, and draw down the adjusted performance. As a result, the return of the dividend index has improved to a certain extent after the increase in the frequency of weight adjustment, and the strategy has achieved an annualized excess return of 1.71% compared with the CSI Dividend Total Return Index since 2013.
Chart: CSI Dividend Index Weighted Quarterly Rebalancing Strategy Net Value Trend
Note: As of 2024-03-29
Source: Wind, CICC Research
Industry optimization
Industry differences lead to a relatively concentrated distribution of dividend stocks. There are obvious differences in the dividends of listed companies among different industries, from the median level of dividends, the bank and coal industries are at a high level of dividends, and the home appliances, non-bank finance, food and beverage and steel industries also have higher dividend yields. Therefore, without industry adjustment, the strategy of selecting dividend stocks based on dividend yield level will often lead to a relatively concentrated distribution of investment industries, such as the CSI Dividend Index with higher risk exposure in the banking, coal, steel and transportation industries.
The industry correction is conducive to the long-term performance of the dividend strategy. The pros and cons of high-risk exposure in the industry are mixed, although you can enjoy the high dividend elasticity brought by the relevant industry, but at the same time, too high industry exposure will also mix the expression of the dividend and the industry. We carry out industry-neutral treatment on the CSI Dividend Index according to the industry distribution of the CSI All-Index Index, and if the corresponding industry weight is higher than that of the CSI Index in the process of selecting constituent stocks, it will be included in the subsequent stocks according to the dividend yield order. Judging from the results, after the neutralization of the industry, the dividend strategy obviously includes more stocks in the machinery, pharmaceutical and basic chemical industries. In terms of returns, it can also be observed that the industry-neutral adjustment is conducive to the income performance of the dividend strategy, and since 2013, the industry-neutral adjustment of the dividend strategy has achieved an annualized excess return of 1.44%.
Chart: Distribution of the number of sectors held by the CSI Dividend Index after neutralization
Note: As of 2024-03-29
Source: Wind, CICC Research
Chart: Net value trend of industry-neutral strategies
Note: As of 2024-03-29
Source: Wind, CICC Research
Overseas dividend growth strategy products are popular. From the perspective of strategy types, overseas dividend products can be roughly divided into two types: high dividend strategy and dividend growth strategy, both of which have received high attention from the market. Historically, due to the problem of discontinuity and weak growth in the dividends of listed companies in mainland China, there are certain restrictions on the layout of such products. However, in recent years, with the gradual maturity of the market and the further improvement of the system, related problems have been improved, the number of long-term dividend growth samples has increased significantly, and dividend growth products have ushered in layout opportunities.
How to construct a dividend growth strategy: We select the dividend stocks with continuous growth in dividend payout amount among the CSI 800 constituent stocks with moderate dividend payout ratios to build a dividend growth strategy. Among them, we will separately count the dividend yield and dividend amount, and the performance effect of the dividend growth strategy screened according to different weighting methods.
Chart: Steps to build a dividend growth strategy
Source: CICC Research
The dividend growth strategy weighted by dividend amount and dividend yield performed well. As can be seen from the figure below, the dividend growth strategies screened according to the dividend amount and dividend yield under the same weighting method have similar effects, but the impact of different weighting methods on portfolio performance is relatively obvious. Among them, the strategy weighted according to the dividend amount and dividend yield performed well, which was higher than the dividend strategy weighted according to the free float market capitalization, so we believe that the dividend strategy is more suitable to optimize the individual weight according to the dividend yield or dividend amount.
Chart: Dividend growth strategies built from dividend yield rankings
Note: As of 2024-03-29
Source: Wind, CICC Research
[1] In this article, active equity funds are common equity, partial stock hybrid, flexible allocation and balanced hybrid funds with no less than 60% of equity holdings in the past two years and the recent period
Article source:
This article is excerpted from: "Fund Research Series (28): Investment, Development and Design of Dividend Products", which was released on April 19, 2024
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