Over 12% Drawdown: Is Dividend Strategy Losing Steam? What's Next?

Dividend-paying assets have become the apple of the eye in the capital market since last year, and dividend strategies have also become the focal point of attention in the volatile market, firmly holding the "C position". However, since late May, the dividend index has started a path of fluctuating decline, and the adjustment has been fluctuating for more than 2 months so far.

Is the dividend strategy "out of fuel"? Is the dividend-paying asset, which is印象中 stable and low-voltage, still suitable for entering the market at this moment?

01

Scale volume VS index decline

In fact, the dividend strategy has been outperforming the market since 2021, achieving good relative and absolute returns. In the past two years, the equity market has been sluggish, and under the continuous spread of risk aversion, funds have turned to dividend-paying assets with smaller fluctuations and more stable expectations.

Against the background of the continuous slowdown in the issuance of domestic equity funds for three consecutive years, dividend-themed funds have gone against the market and are very popular.

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As of mid-July, this year's newly issued dividend funds totaled 46, with an issuance share of 18.3 billion, which has far exceeded last year's level. Such a large volume, compared with the data of the past 14 years, is at an absolute peak.

When the equity market performs poorly, the increase in defensive demands will indeed benefit the new issuance of dividend funds. However, on the other side of the overheated market, the dividend index has experienced consecutive adjustments.

The CSI Dividend Index has a cumulative increase of more than 15% from the beginning of the year to May 27, while the Wind All A cumulative increase is -8.4%; but the subsequent adjustment path has caused the dividend index to fall more than 12% from the high point, almost falling off the increase in the first half of the year.What exactly happened behind the index's oscillatory downward trend?

02

Why is the dividend "shrinking circle"?

Starting from late May, significant differentiation has occurred within the dividend sector. As the overall market and the CSI Dividend Index underwent significant adjustments, the market's embrace of dividend assets further narrowed, showing a trend of "shrinking circle".

During this phase, the relative excess returns of ultra-large market value, low volatility bond-like low fluctuation dividend leaders, such as banks and public utilities, against the CSI 300 and the CSI Dividend Index, reached new highs, even far exceeding the two rounds of peaks in February and late April this year. The adjustment of resource-related varieties within the dividend sector during this phase may be an early performance of overseas interest rate cut expectations in commodities.

This sinking and shrinking circle reflects the market's concentration towards defensive sectors under the weakening economic expectations, indicating that the market's risk preference had previously reached an overly pessimistic state. It should be noted that the excess returns of bond-like low fluctuation dividend leaders have begun to converge recently, and the market's risk preference is gradually moving towards natural repair from an overly defensive state.

If we extend the timeline, we will find that the adjustment of dividends itself is a calendar effect of A-shares.

Tianfeng Securities' review of the dividend index's market trends over the years found that historically, the ratio of CSI 300/CSI 1000 often weakened in May-July; from the perspective of the dividend yield increasing the excess market trend, it can also be seen that the adjustment effect of dividends in June-July.Dividend increases lead to relatively high excess returns for individual stocks compared to the entire A-share market. In such cases, there is a certain bullish profit-taking pressure on the logic of high dividends and high dividend yields. This year, the market's interpretation of dividend rate increases has been vigorous, arguably the highest in recent years, and the pullback caused by bullish profit-taking is a normal reaction.

03

Is there still "profit" in dividends to be made?

Are dividend assets still worth investing in after a period of adjustment? How should ordinary investors grasp the opportunity?

The general market view is that dividend assets remain an excellent choice for a core portfolio, with the medium to long-term logic unchanged.

CICC believes that the recent adjustment in high dividend stocks may be partly due to an influx of funds earlier, leading to some funds taking profits, and may also be affected by the decline in commodity prices. However, if the investment horizon is extended to the next 1-2 months or the second half of the year, the value of high dividend allocation remains prominent. The combination of structural forces and a weak recovery cycle may provide an ideal macro environment for high dividend performance.

CITIC Construction Investment believes that under the current expectations of corporate earnings, and with the overseas "turbulent period" not yet over, stable dividend assets, due to their defensive advantages, should still be the main core portfolio varieties.

Tianfeng Securities suggests that there may be two types of signals for the long-term cycle reversal of high dividend excess returns: first, the central point of long-term Treasury bond rates no longer declines, and second, the dividend rate of the high dividend sector is further hindered from increasing. In combination with the current situation, a long-term style switch requires more patience for more right-side signals, and "patient assets" and other high dividend directions may still be relatively advantageous.

The effectiveness of the dividend strategy is supported by the following core logics:

- The economic environment shifts from high-speed growth to stable growth. From the current macroeconomic fundamentals, economic data show that the domestic economy still faces constraints of insufficient demand and weak real estate. The dividend strategy offers considerable stable compound interest, with strong continuous positive returns, making it attractive.→ As interest rates decline, dividend-paying stocks gain a relative advantage in terms of dividend yield. For equities, dividends represent the numerator, while the discount rate is the denominator, with interest rates being the most significant objective factor affecting the discount rate. The lower the interest rate, the more it benefits the elevation of intrinsic value, making the low-interest-rate era favorable for dividend strategies. On the other hand, from the perspective of the dividend yield spread, the dividend yield of dividend-paying sectors has a clear comparative advantage over government bond yields. Currently, the dividend yield of the CSI 300 Dividend Index is still more than 3.5% higher than the yield on 10-year government bonds, placing it at a relatively high historical level.

→ Policy orientation suggests there is still room for interest rate cuts in the second half of the year. The "Nine National Guidelines" propose to strengthen the supervision of cash dividends of listed companies, which is a significant positive for dividend assets. Looking at the domestic economic environment, facing the reality of insufficient domestic demand and low inflation levels, domestic monetary policy still needs to remain loose, and the risk of a significant increase in risk-free interest rates is limited.

Since May, the market has experienced a significant adjustment. Structurally, both dividend-paying and growth stocks, from domestic demand to external demand sectors, have been revised downward to pessimistic expectations. They are now at support levels, with a higher probability of stabilizing.

In the context of a credit cycle that has not significantly opened up and a downward trend in long-term growth expectations, dividend factors that provide stable returns to hedge against the downward trend in long-term returns still have investment value, unless fiscal policy is vigorously implemented. However, at present, it is still unrealistic to expect strong stimulus. Various internal and external constraints make it difficult for policies to be presented in a "one-size-fits-all" manner. Under these circumstances, we believe that dividend assets remain a more preferred allocation option.

Specifically, in terms of allocation strategy, one can focus on relatively stable assets with stable returns and relatively high dividend rates, such as government bonds, central enterprises, and large-cap high-dividend equities; on the other hand, so-called high-risk assets that have fallen to a certain extent will also have allocation value.