- 2024-06-19
- News
The Mystery of "Everlasting" and Global Pursuit of "Dividend" Assets
Last week, the U.S. stock market underwent a significant shift.
Several major traditional high-dividend sectors have risen, facing the new elite like the technology sector with renewed confidence.
The S&P Bank Index has risen by 16.14% in the last seven trading days, and the Regional Bank ETF has risen by 18.89% in the same period. The Public Utilities and Communication Services Index has risen by 8.7% in the last six trading days. The Energy Select Sector SPDR Fund has risen by 5.02% in the last six trading days, with all of the above sectors experiencing consecutive gains over the past six trading days.
On this side of the ocean, the A-share market has been playing out a similar scenario for at least half a year.
The Bank ETF, Public Utilities Index, China Mobile, China Telecom, China National Petroleum Corporation, and other indices and individual stocks have continued to strengthen, with phase returns exceeding 20%.
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These sectors in the A-share market have a resounding name, "China Special Valuation" ("中特估"), characterized by central enterprises, high dividends, and stable profits. In fact, they have been quietly contended for by various forces since last year.
What was truly unexpected was the day when "U.S. Special Valuation" ("美特估") would follow in the footsteps of "China Special Valuation", with U.S. stock investors shifting from technology stocks to embrace enterprises with good cash flow and strong certainty.
In addition to the U.S. stock market, the Japanese and European stock markets have long been dominated by "dividend" returns. As of 2022, the number of Japanese companies that have paid dividends for more than five consecutive years accounts for 80% of all listed companies. In the first decade of 2022, the impact of dividends on the final returns of the European stock market reached as high as 66.4%.
Global stock markets are collectively entering a "dividend" period.Mature markets never neglect companies with strong dividend capabilities. "Buy growth when there is growth," and "buy high dividends when there is no growth" are the main characteristics of the stock markets in the United States, Europe, and Japan.
At the current stage, high-quality growth investment opportunities are relatively scarce, and high dividends are emerging. Investors in the large A-share market are increasingly inclined towards dividend assets.
In addition to the economic fundamentals, there is, of course, the promotion of policies.
In April of this year, the "New Nine Articles" were introduced, strengthening the supervision and management of cash dividends of listed companies, and encouraging listed companies to increase dividends and distribute dividends multiple times.
As the domestic economy transitions from a high-speed growth phase to high-quality development, the quality of dividend assets and their dividend attributes are the stable anchors of value investment.
Dividends have become an aesthetic preference of an era. However, after a year of clustering, the congestion of dividends is also increasing, with the dividend yield of China Shenhua dropping from 8% to 5.5%. The identification of high-quality dividend stocks has become particularly important.
The Key 3%
When the economy bids farewell to high growth, most people may have to get used to the number 3%.
For example, a rental yield of 3% is a key indicator of whether real estate is worth investing in, a compound interest rate of annuity insurance falling below 3% implies a certain view of the economic outlook, and a net profit margin of 3% is actually the lifeline for many enterprises...Pursuing good stocks that can sustain dividends also has a 3% threshold.
There is a dividend rule in A-shares: when dividends are distributed, in the short term, there will be no change in the total market value of the account. The market value of the dividend account is equal to the original account market value minus the dividend, which is commonly referred to as "ex-rights."
Holding high dividend stocks does not directly yield high dividend returns on the dividend payment date. This is a rule set to prevent malicious arbitrage speculation.
Only when the stock value rises back to the original account market value after the dividend payment can the dividend income be fully harvested. This process is called "filling the rights."
This leads to the appearance that stocks with higher dividend yields may correspond to net profits at the top of their own cycle during the dividend period, or the dividend payout ratio may be at a historically high level. Subsequently, their profitability and dividend levels may fluctuate, making it difficult to maintain a high dividend yield, and future dividends may not be sustainable.
As of June 30, 2024, among individual stocks with a dividend yield exceeding 3%, there are only more than 10 stocks with a price increase since the ex-rights and ex-dividend date that exceeds their dividend yield, accounting for less than 5%.
For dividend stocks, a higher dividend yield is not necessarily better. A 3% dividend yield is the entry threshold for dividend stocks. Truly "high-quality low-growth" companies often have higher long-term investment returns than those "low-quality high-growth" companies.
Only growth from the company itself and an increase in valuation can achieve the action of "filling the rights" and even obtain capital gains (stock price increase). The four major banks are the best examples. After the dividend payment, the stock price rises back to the original price and continues to break through historical highs.
Only continuous growth can be called a good dividend.Over the past five years, aside from the U.S. stock market being driven by technology growth valuations, other countries have been characterized by dividend-led markets, with dividends contributing significantly across various economies. This reflects the industry's entry into a mature phase, where leading companies, after a period of intense competition and consolidation, secure stable dividends.
Stable dividends originate from stable industry profits. As industries evolve from growth through consolidation to maturity, dividend yields are subsequently boosted. Several industries in China are also entering a mature phase, such as coal, banking, electricity, and telecommunications.
Industries that have entered a mature phase of stable growth neither experience complex technological changes nor do they face a decline in demand and profits.
Technological revolutions like artificial intelligence occur once in a decade, while high dividend payouts are an annual occurrence.
From a global perspective, examining the distribution of high-dividend industries, the four industries with the highest annual dividend yields in 2023 are energy, banking, insurance, and transportation. The characteristics of high-dividend industries globally share some similarities with those domestically.
Looking at industry concentration, the main high-dividend industries worldwide have shown a trend of increasing concentration over the past 5-10 years. Industries have gone through a fiercely competitive phase where the weak were eliminated, and the strong remained, leading to a mature phase where stable profits are reaped.
Leading companies within these industries often have the best long-term cash flows and profitability, and they possess a stronger ability to navigate through market cycles.
In retrospect, energy, banking, insurance, transportation, electricity, and telecommunications have been the high-dividend choices of the past. These industries are characterized by strong monopolies and resource concentration, with large enterprises having significant market value and smaller fluctuations.
However, this is based on past experience, and different industries have their own cyclical characteristics. Energy is influenced by global supply and inflation cycles, electricity has recently been driven by computational power, and transportation is linked to international security situations, demanding a high level of fundamental research.
For a company to be profitable, it must also be willing to distribute dividends.The introduction of the new "Nine Articles for the Nation" is expected to become a historical turning point for the entire population to enjoy shareholder returns.
Follow the smart money
The "dividend" era has arrived, and it is not easy to find stocks that meet the standards.
The conventional approach is to see what the smart money is doing, and more simply and directly, to see what the outstanding fund managers are doing.
From the perspective of price increases, the dividend market started last year, and most of the funds that performed well are related to the dividend sector. Based on the calculation of merged shares, there are 51 active dividend funds established for more than 1 year in the entire market, but the performance difference between the top and bottom in the past year is 50 points, which is a significant difference.
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Among these 51 active dividend funds, as of the end of the second quarter, ICBC Dividend Enjoyment Mixed A ranked third in performance in the past year. Fund manager You Hongye is one of the best fund managers in active funds to grasp this round of dividend market.
Fund manager You Hongye took over ICBC Dividend Enjoyment in February 2023, previously serving as the Director of Investment at ICBC Credit Suisse Pension Investment Center, managing dedicated investments for a long time.
After taking over ICBC Dividend Enjoyment in the first quarter of 2023, You Hongye decisively adjusted the position, concentrating the position in public utility sectors such as electricity, transportation, and telecommunications.Many public utility stocks continued to soar in stock prices afterward, with many stocks in the power sector reaching new highs for the phase. You Hongye has always emphasized the importance of the circle of competence. In his view, accumulating long-term advantages within the circle of competence can at least see a little further than the market and have more certainty.
Under You Hongye's management, ICBC Bonus Enjoyment has heavily allocated many high dividend Hong Kong stocks. In the first and second quarters of this year, ICBC Bonus Enjoyment heavily allocated 7 high dividend Hong Kong stocks, and the number of heavy allocations was also the most in the past.
There has been a long-term premium between Hong Kong stocks and A-shares. The same companies are cheaper in Hong Kong stocks, with higher dividend rates and more dividends.
At the end of the first quarter, the closing price of the entire Hong Kong dividend sector was the same as the beginning of the year.
By the second quarter, the premium difference of high dividend Hong Kong stocks was widely excavated, and funds set off a wave of buying dividends in the south. Hong Kong dividend ETFs rose by 9.88% and 10.33% in April and May, respectively, during which ICBC Bonus Enjoyment's net value made a lot of profit.
Taking the lead, lying in wait at a lower position, and obtaining capital gains are also related to You Hongye's consistent investment philosophy. He once said, "The overall investment style will be relatively contrarian, hoping to find industries that can be understood and have enough safety margins."
Changsheng Quantitative Dividend has a return of 12.29% in the past year, which is also far ahead of the market average. Fund manager Wang Ning is one of the few fund managers in the market who have both active investment and quantitative investment management experience.
Like lying in wait for the market's "expectations", on the one hand, capturing "expected dividends", that is, referring to historical dividends is a common practice in the market. Whether it is the constituent stocks of the CSI Dividend Index or some other dividend products, they will refer to historical dividend factors.
On the other hand, pay attention to "expected profits", and focus on companies with good fundamentals, good cash flow, and certain growth potential, so as to share in the capital gains when the capital market warms up and improves.The Central European Dividend Optimized Flexible Allocation Mixed Fund has achieved a return of 9.37% in the past year, managed by fund manager Lan Xiaokang. Over the past year, the fund has focused on "Chinese characteristics valuation, upstream resources, and high dividends" for asset allocation, effectively capturing investment opportunities in dividend assets.
Lan Xiaokang's investment philosophy combines a "top-down" and "bottom-up" approach:
"Top-down" involves identifying core contradictions in the prosperity and decline cycles of different industries within the macroeconomy, grasping opportunities for value return and investments that are not yet fully priced;
"Bottom-up" involves digging for undervalued and high-quality individual stocks, preferring companies that "cultivate their business meticulously," and avoiding companies that engage in "crazy expansion," "dishonesty," and "high risk."
Regarding investment returns, the market's feedback is always the correct answer.
The investment "aesthetics" of the A-share market are shifting towards dividend stocks. These perceptive fund managers have captured the dividends of the era in advance, leading to growth in the net value of the funds.
This investment aesthetic is aligning with international standards and is also driving the survival of the fittest among listed companies, guiding them towards a reasonable direction. Given time, a rational valuation system will drive the broad market index to align with international standards, resulting in a long-term bull market trend.
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