Last week, I wrote "Next Stop, High Dividends of Hong Kong Stocks", and many friends were amazed: The dividend tax on Hong Kong stocks is so high as 20%!?
As an A-share investor, from a tax point of view, it is happy, there is no capital gains tax, and the dividend tax can be exempted after one year, so there is almost no concern about the tax issue of stock investment.
However, in many developed countries, taxation is an important part of personal financial life and an important variable in determining investment behavior. Benjamin Franklin famously said, "There are only two things in the world that are inevitable, and that is taxes and death."
So, if you want to reduce the tax burden and further increase the dividend yield, you can use the best of both worlds?
The answer is yes: with good policies and QDII, the dividend yield of Hong Kong stocks can be "increased" by 25% in disguise.
Up to 28% tax on dividends
When writing "Next Stop, High Dividends in Hong Kong Stocks", I simply used 20% to calculate the dividend yield loss of investing in Hong Kong stocks.
Of course, such a statement is not rigorous, and it is not enough to show the erosion of investment income from taxation. In fact, mainland individual investors investing in Hong Kong stocks through the Hong Kong Stock Connect are subject to a dividend tax of up to 28%.
On this issue, to fully understand, is a very complex matter, which can be summarized in three categories:
- Buy H shares listed in Hong Kong, ChinaClear withholds 20% dividend tax;
- For the management institution's domestic red chips (e.g. China Mobile), 28% of the personal income tax will be deducted (the dividend-paying company will withhold 10%, and ChinaClear will withhold another 20%)
- For the management of red chips in Hong Kong (such as China Taiping), or private enterprises, Hong Kong local enterprises, etc., ChinaClear deducts 20% dividend tax.
If you want to understand the detailed policies behind it, you can read the research report "Detailed Explanation of Dividend and Dividend Tax in Hong Kong Stock Investment" by China Securities Construction Investment on October 9, 2023 or "[Guojun Daiqing |] in September last year Hong Kong stocks] The origin, method and impact of the dividend tax on Hong Kong stocks - The past of Hong Kong stocks II".
For ordinary investors, in fact, just understand the table produced by China Securities Construction Investment.
Yes, the most important part of the above table is the part I have drawn in red - foreign investors, buy H shares dividend tax 10%, red chips depending on the management headquarters 0 or 10%, Hong Kong local enterprises or foreign shares, it is 0%.
From the perspective of tax saving, enjoying the treatment of "foreign investors" has a huge effect. For example, if a red-chip stock with its management headquarters in China (i.e., recognized as a Chinese resident enterprise) is purchased through the Hong Kong Stock Connect, the dividend tax is 28%, and the dividend payment of 1 yuan is only 0.72 yuan, but if you buy it as a "foreign investor", the dividend tax is only 10%, and the dividend is 0.9 yuan, from 0.72 to 0.9 yuan, and the after-tax dividend has increased by a full 25%. In the case of H-shares, the dividend tax can also be reduced from 20% to 10%, which equates to a 12.5% increase in dividends.
Becoming an "overseas investor" is as easy as a matter of time – as long as you invest in Hong Kong stocks through QDII funds instead of Southbound funds.
珍惜 QDII 港股高息基金
Yes, please cherish and pay close attention to the few QDII high-dividend funds in the market.
How hot the QDII is, if you had been following the crazy premiums of a few Nikkei ETFs at the beginning of the year, you would have understood this "scarcity".
QDII is a special channel that requires the approval of the State Administration of Foreign Exchange, and it is easy to see that because QDII funds are too favored and the new quota is not approved by the State Administration of Foreign Exchange, the purchase is restricted, and the premium rate is likely to rise sharply when placed on ETFs.
In contrast, the Hong Kong Stock Connect fund, because it is through the Hong Kong Stock Connect channel, so the quota is close to "unlimited". In recent years, most of the new Hong Kong stock funds have taken the Hong Kong Stock Connect. After all, for fund companies, the precious QDII quota is not fragrant to issue a NASDAQ or other overseas stock market, so why occupy the precious QDII quota on Hong Kong stocks.
Therefore, in recent years, I would like to pay tribute to every fund company that is willing to use QDII quota to issue Hong Kong stock funds - as a high-dividend stock strategy enthusiast.
In the early years, when overseas investment was not so tight, there were actually a lot of QDII Hong Kong stock funds, but they mainly tracked the Hang Seng Index and the Hang Seng China Enterprises Index, of which the Hang Seng China Enterprises Index has always been regarded as a value depression and has become an excellent carrier for A-share and H-share rotation enthusiasts based on the Hang Seng AH Share Premium Index.
However, in recent years, with the revision of the index compilation rules of the Hang Seng Index and the Hang Seng China Enterprises Index and the introduction of more technology stocks, their "value attributes" have been greatly reduced.
Taking the Hang Seng China Enterprises Index as an example, it has fallen heavily so far in 2021, and the index is even lower than in early 2016, but with such a low index position, the dividend yield is only 3.58%, which is not the same as the 6%+ of that year. This is why a number of tech stocks have diluted the "value" flavor of the Hang Seng China Enterprises Index.
Source: Wind Financial Terminal
Fortunately, in recent years, some fund companies have issued some QDII Hong Kong stock funds with high dividends and the concept of central state-owned enterprises, which have finally expanded the optional targets.
Last Friday, I bought a little Hang Seng Central Enterprises ETF (513170), not only because of its high dividend yield, but also because of the discount arbitrage space that has just been listed.
QDII quota is a scarce commodity, and QDII ETFs are more complex to subscribe and redeem, so the discount and premium of QDIIETF often have a bizarre distribution, even if it tracks an index, the premium rate may vary greatly. Therefore, when choosing a QDII ETF, you must pay close attention to the premium rate.
For example, the chart below is a multi-day intraday chart of a QDII-shaped Hong Kong high-dividend ETF, and you can see that the black price curve is significantly higher than the purple IOPV net value curve, which is generally a premium of more than 2%.
Source: Wind Financial Terminal
For lovers of high-dividend strategies, it is necessary to have the mentality of having to compare the baht.
If you even care about the difference between 28% and 10% dividend taxes, then the 2% premium is even more unbearable.
Naturally, such a bright 1.5% discount for the Hang Seng Central Enterprises ETF (513170) cannot be missed. This is a new ETF that was launched on April 10 and only debuted on April 19. It is not surprising that new ETFs are trading at a discount in the early stages of their listings, especially given the recent good performance of Hong Kong stocks. However, this discount may not last for a long time, after all, if you look at several other similar funds, it is generally parity and a small premium. From this point of view, buying at a discount can be regarded as winning at the starting line. Of course, by the end of Monday's trade, the discount had already contracted to the level of 0.76%.
Source: Wind Financial Terminal
Alternative Hong Kong stocks high dividend strategy
The Hang Seng Central Enterprises ETF (513170) tracks the Hang Seng China Central Enterprises Index (HSCSOE.HI), a new index that was only released in April 2023.
Compared with the more familiar Hang Seng China Enterprises Index, because of the focus on central enterprises and the absence of trendy Internet companies, the decline in the past five years has been limited, and it is not as hurt as the Hang Seng China Enterprises Index.
The Hang Seng China Enterprises Index is considered by me to be a "quasi" high dividend index. As can be seen from the table below, the rolling 12-month dividend yield as of the first quarter was 6.54%, which is still much higher than the A-share index of similar central enterprises.
Source: Wind, Bloomberg
Because this is a central enterprise index, the constituent stocks have significant central enterprise characteristics, according to the proportion of industries disclosed by the Hang Seng Index, financial stocks account for 32.06%, energy 25.41%, and telecommunications 12.11%.
Although it is not a high dividend index, judging from the performance of the index since its release, even compared with the more eye-catching CSI Hong Kong Stock Connect High Dividend Index among the Hong Kong Stock Connect High Dividend Index this year, it often has a slight advantage, and leads the rise from time to time. If you consider the advantages of a QDII vehicle in terms of dividend tax, this means that the long-term total return will be slightly higher.
With the tax incentives brought by QDII + the discount arbitrage opportunity of the newly listed company + the solid performance compared to its peers in the past, the Hang Seng Central Enterprises ETF (513170) is obviously one of the similar funds that is particularly noteworthy in the near future.