Despite the current volatility in the A-share market, it seems that there remains a silver lining — generous dividendsThis year, the mid-year dividends distributed by A-shares have reached an impressive 530 billion yuan, marking a historical peakFor many novice investors, the risky and fluctuating nature of the stock market may seem dauntingHowever, these dividend-rich opportunities are not entirely out of reachOne potential strategy for participating in this windfall is through dividend-themed funds.
But what exactly is a “dividend fund”? In essence, these funds adhere to a dividend strategy, predominantly investing in companies that maintain consistent and reliable dividend paymentsThese funds typically track a specific dividend index, focusing on stocks that offer sustainable returns through dividends.
The fundamental premise of dividend investment revolves around the concept of dividend yield, which serves as the guiding metric in stock selectionThis strategy targets companies that offer stable and repeated dividends, with the goal of maximizing returns through their comprehensive dividend distributionsIn the realm of A-shares, companies capable of providing stable dividends are deemed profitable dividend assets, which are typically categorized as high-yield stocks with a track record of consistent dividend payoutsThere are three crucial characteristics of these dividend assets:
1. Profitability: A company must be profitable and possess ample cash flow to enable dividendsThis is the foundational aspect of high dividends.
2. Stable operations: Companies should have stable operational expectations to sustain annual dividends, with a dividen rate that usually ranges from 40% to 60%. When a company records consistent large profits without needing to reinvest heavily for expansion, it tends to distribute most of its profits to shareholders
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Typically, such firms are dominant players in their industries, akin to holding bank wealth management products with the primary purpose of yielding steady dividends, such as in sectors like banking, petrochemicals, energy, telecommunications, and infrastructure.
3. Attractive pricing: High dividend yields are generally associated with lower stock pricesThe dividend yield is calculated as the pre-tax cash dividend distributed to shareholders over the stock priceA scenario where the stock price is relatively low yet the dividends are significant results in a notably high yield.
It is important to note that the portfolio of a dividend-themed fund is not restricted to specific industries or companies but is instead adjusted based on the earnings cycles of included firmsWhen a company enters a downturn or is faced with intense competition leading to tightened cash flows and diminished earnings, the likelihood it will distribute dividends decreases, and consequently, its dividend yield dropsThe fund managers of these dividend-themed portfolios typically exclude such stocks and increase the weighting of stocks from other high-yield sectors.
For instance, during the years 2017 to 2021, the real estate sector recorded a robust return on equity (ROE) and a high dividend rate, thus holding a prominent share in the dividend fund portfolioHowever, starting in 2022, the sector entered a decline, prompting a substantial drop in ROE, which ultimately led to a withdrawal of real estate stocks from the dividend fund.
Nonetheless, it is crucial to understand that not all “dividend” funds are guaranteed to generate profits under varying market conditionsAccording to statistics from Wind, as of current, over a hundred dividend-themed funds exist in the market, yet only 25 have reported returns exceeding 6% in the past yearAmong these, the “Industrial and Commercial Bank of China Dividend Select A” fund leads with an impressive return of 13.89% over the last year.
A deep dive into these top-performing dividend funds reveals a common theme: many include the term “low volatility” in their product names, such as “Orient Securities CSI Dividend Low Volatility A,” “Morgan Stanley Low Volatility Dividend A,” and “Harvest CSI 300 Dividend Low Volatility ETF.” The term “low volatility” refers to the relatively stable price fluctuations of the stocks held within these funds
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Such funds aim for a dual benefit of high dividend yields and low stock price volatility, with banks often cited as the most favorable choice for these criteria.
Taking the “CSI Dividend Low Volatility Index” as a reference, it allocates up to 35% in its bank sector holdings, while comparatively underweighting petroleum, construction, and other sectorsOver the past decade, the average dividend yield from this index has escalated to about 5.5%, notably influenced by the bank stocks' popularity.
This year, the “dividend low volatility” funds are experiencing a particularly advantageous phase: not only are high-yield stocks dishing out substantial dividends, but their stock prices have also surged significantlyMany leading banks have reached historical price highs, distinguishing the performance of “dividend low volatility” funds from their less successful peersFor example, funds like “China Overseas Mixed Reform Dividend A,” “Citi Construction Reform Dividend A,” and “Manulife CSI Major Consumer Dividend A” have endured drops exceeding 20%, with “Guolian Smart Selection Dividend A” falling by over 30% in the last year.
Hence, while “dividend” funds are trending, discerning investors should recognize that amidst unfavorable market conditions, the winning combination will always be “dividend” plus “low volatility.”
Statistical data shows that approximately 60 new dividend funds have emerged this year, accumulating an issuance scale of over 22 billion yuan, surpassing last year's total of only 21 funds and 8 billion yuan scaleThere remain 42 dividend funds currently in the pipeline, expected to further stimulate market growthIt is interesting to note that between 2014 and 2023, only 97 dividend funds were established, showcasing the renewed interest in this strategy as this year alone surpasses the historical trends significantly.
Recently, there has been an adjustment within the dividend asset space, prompting Guotai Junan to predict an imminent reduction in interest rates, especially considering the favorable exchange rate conditions and the macroscopic reverberations from domestic exporters
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