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Dr. Tan Huaqing, Chief Macro Analyst of Harvest Wealth
In the highly volatile A-share market, there are a few sub-indices that have come out of the characteristics of long bulls, and the dividend index is one of them. In the past two years, the A-share market as a whole has dominated the following behaviors, and the dividend index has stepped out of the contrarian upward trend, which has attracted much attention. More and more institutions and investors are paying attention to the investment opportunities of dividend indexes. But because of this, investors are also worried about whether the dividend index has reached a relatively overvalued position, can they still invest, and how to invest in the future?
01 Understand dividends and dividend indices
Listed companies make money, take out a part of the profits to distribute to shareholders, in the return to shareholders at the same time, can also be used to show the market stable and good business performance, enhance investor confidence, establish a good corporate image, everyone calls this part of the money dividends. Listed companies can distribute dividends to shareholders in the form of cash, stocks, etc., among which cash dividends are also called cash dividends, and the "dividends" in the name of the "dividend index" we call generally refer to cash dividends.
By the end of 2023, more than 3,500 listed companies in Shanghai and Shenzhen had paid cash dividends, with a total dividend of about 2.03 trillion yuan, and the average dividend payout ratio in the A-share market was 35.2% and 2.1%, both of which increased from 2022.
Figure 1 Dividends of A-share listed companies in the past five years (100 million)
In the market, dividend yield is generally used to measure whether cash dividends are high or low. Dividend index, as the name suggests, is to combine individual stocks with high dividend yields according to certain rules and update them dynamically. As a result, dividend indices typically have higher dividend yields than other indices.
Figure 2 Formula for calculating dividend yield
02 Rules for the compilation of the CSI Dividend Low Volatility 100 Index
Taking the CSI Dividend Low Volatility 100 Index as an example, the compilation rules of the dividend index are introduced in detail.
- Compilation of CSI Dividend Low Volatility 100 Index
· Sample Space:
Same as the sample space of the CSI All-Index Index.
· Stock Selection Criteria:
(1) The securities in the sample space are ranked according to the average daily turnover in the past year from high to low, excluding the bottom 20% of the securities;
(2) Select securities with cash dividends in the past three consecutive years and a cash dividend yield greater than 0 in each year;
(3) for the remaining securities in (2), calculate the dividend yield and past year volatility of each security;
(4) For (3) securities, the top 300 securities are first ranked in descending order of dividend yield, and then the top 100 securities are selected as index samples according to the ascending ranking of volatility in the past year.
· Methodology:
The weighting factor is between 0 and 1 so that the sample is weighted by dividend yield/volatility over the past year, and the weight of the CSI secondary industry to which the sample belongs does not exceed 20%.
· Update Rules:
The index sample is adjusted quarterly, and the sample adjustment is implemented on the next trading day on the second Friday of March, June, September and December each year. The weighting factor is adjusted with the periodic adjustment of the sample, and the adjustment time is the same as that of the periodic adjustment of the index sample. Before the next periodic adjustment date, the weighting factor is generally fixed.
Through dynamic updates, companies with lower dividend yields can be excluded in time to improve the health of the index.
We often say that U.S. stocks are long-term, and the long-term resilience of economic fundamentals is one factor, and another important factor is that the index compilation of U.S. stocks is more scientific. One is to consider the profitability index, and the other is to dynamically update those listed companies with sustainable and good operating ability to achieve survival of the fittest.
Compared with the S&P 500, the domestic broad-based index, whether it is the Shanghai Composite Index, CSI 300, CSI 500, CSI 1000, or ChiNext Index, has no profit index, and is mainly sorted and weighted according to the circulating market capitalization.
Table 2 Comparison of the compilation rules of major indices in China and the United States
As you can see, the core difference between the S&P and the major domestic broad-based indices is that the S&P includes earnings conditions. To be profitable for four consecutive quarters of earnings, a loss cannot be included in the index, even if the market capitalization is large enough but there is a quarterly loss.
Judging from the compilation rules of the CSI Dividend Low Volatility 100 Index, if the dividend is a representative indicator of profitability, the compilation of the dividend index takes profitability into account.
Therefore, in this sense, the CSI Dividend Low Volatility 100 Index is the closest domestic index to the S&P 500 compilation rules. From the perspective of historical performance, it is not surprising that the CSI Dividend Low Volatility 100 Index has come out of the characteristics of a long bull.
Through the continuous optimization of the compilation rules, the CSI Dividend Low Volatility 100 Index places more emphasis on the ability to continuously pay dividends and the quality of dividends, and we remain optimistic about the long-term performance of the Dividend Index.
2. Industry distribution
The industry distribution of the dividend index is not mostly in the bank and coal. Banks and coal are indeed the top two industries, but they only account for about 30% in total, and more than 70% are non-banks and coal, and the industry distribution is relatively fragmented.
Table 3 Sector distribution of CSI Dividend Low Volatility 100 Index Note: As of December 31, 2023. Data from Wind
3. Distribution of enterprise ownership
Table 4 Ownership of the top 10 heavy-weight stocks in the CSI Dividend Low Volatility 100 Index Note: As of March 31, 2024. Data from Wind
From the perspective of heavy stocks, the top ten heavy stocks of the CSI Dividend Low Volatility 100 Index are mainly state-owned enterprises and central enterprises, and there are also certain private enterprises.
4. Comparison of the compilation rules of the main dividend index
Table 5 Comparison of the compilation rules of the main dividend indices Source: China Securities Corporation, Wind
There are many dividend indices in the market, and investors sometimes don't know how to choose. Table 5 compares the compilation rules of the mainstream dividend indexes, from the aspects of stock selection rules, scope, weighting method, and update frequency. Investors can refer to the introduction of the compilation rules of the CSI Dividend Low Volatility 100 Index, and make a comprehensive selection based on factors such as the scope of stock selection, the frequency of sample updates, the stability of dividends, and the weighting method. Specifically, we recommend investors to focus on the CSI Dividend Index, CSI Dividend Low Volatility 100 Index, and CSI 300 Dividend Low Volatility Index.
03 The allocation value of the dividend index
Dividends are one of the important sources of income for investors to obtain stock investment income, among which cash dividends are the most common form of dividends for listed companies. In recent years, with the improvement of the awareness of cash dividends of listed companies and the revision and improvement of relevant policies such as the Regulatory Guidelines for Listed Companies No. 3 - Cash Dividends of Listed Companies, the reasonable dividends of listed companies have been continuously guided and encouraged, and the overall dividend scale of listed companies in mainland China has shown a continuous growth trend, and the dividend behavior has continued to improve and the quality of dividends has been improved.
Judging from the past historical data, taking the Dividend Low Volatility 100 Index as an example, the performance of the A-share Dividend Index is very bright, compared with the mainstream broad-based index, it has stepped out of the characteristics of slow bull and long bull. In the medium to long term, it is basically close to the S&P 500 index in the United States.
Figure 3 Medium- and long-term trends of the CSI Dividend Low Volatility 100 Index and major broad-based indices in China and the United States Data source: Wind.
The statistical period is from December 30, 2007 to April 7, 2024. The above is only used for the purpose of investor education and does not constitute any publicity and promotion. Past performance is not indicative of future performance, the market is risky, and investment should be cautious.
Table 6 Risk-return characteristics of the dividend low volatility index and the mainstream index Data source: Wind.
The statistical period is from December 30, 2007 to April 7, 2024. The above is only used for the purpose of investor education and does not constitute any publicity and promotion. Past performance is not indicative of future performance, the market is risky, and investment should be cautious.
Figure 4 The main drawdown range of the CSI Dividend Low Volatility 100 Index Data source: Wind.
The statistical period is from December 30, 2007 to April 7, 2024. The above is only used for the purpose of investor education and does not constitute any publicity and promotion. Past performance is not indicative of future performance, the market is risky, and investment should be cautious.
The dividend index has the characteristics of a bond because it pays dividends and has a certain degree of stability. However, from the perspective of the volatility attribute of the net value trend, the dividend index is still mainly biased towards stock assets, and when the stock market is extreme, the dividend low volatility 100 index often has a maximum drawdown of more than 20%, which is difficult for bond assets to appear.
04 How to invest in dividend indexes
In a low interest rate environment, dividend assets with the ability to continue to pay dividends are expected to continue to attract investors' attention. We believe that dividend index assets are expected to continue the characteristics of slow bulls and long bulls in the past, but there may also be some volatility in the middle. For such assets that may fluctuate upwards in the long run, a better investment strategy is to stick to regular investment and buy dips for a long time.
Some investors are concerned about whether the current dividend index is overvalued. To assess whether the dividend index is overvalued in the short term, the current dividend yield of the dividend index can be compared with the yield of the 10-year Treasury bond to some extent.
Figure 5 The dividend yield of CSI Dividend and CSI Dividend Low Volatility 100 Index is still above 5% Data source: Wind.
Statistics as of April 25, 2024. The above is only used for the purpose of investor education and does not constitute any publicity and promotion. Past performance is not indicative of future performance, the market is risky, and investment should be cautious.
Figure 6 The dividend yield of the CSI Dividend Low Volatility 100 Index is significantly higher than the 10-year yield of treasury bonds Data source: Wind.
The above is only used for the purpose of investor education and does not constitute any publicity and promotion. Past performance is not indicative of future performance, the market is risky, and investment should be cautious.
Figures 5 and 6 show that the dividend yield of the CSI Dividend Index and the CSI Dividend Low Volatility 100 Index is more than 5%, and the yield of the 10-year treasury bond is only about 2.3%.
Therefore, we believe that the dividend index is likely to be in the investable range, and the all-weather strategy that includes the dividend index is still likely to be in the investable range.
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