Dividend Investing Poised for Resurgence?

After the fluctuations witnessed in October, the dividend assets seem to be making a comebackRecent trends show that dividend-themed ETFs have seen a continuous influx of funds for five weeks straight, and as of December 7, the total scale of such ETFs has surpassed 80 billion.

This raises a pertinent question: will the dividend assets witness a significant return in the near future? Is it wise to consider dividends as a primary strategy for portfolio allocation in the coming year? Let's delve deeper into this subject.

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Let's begin with the timing system of dividends.

Dividend Yield: The Core Appeal of Dividend Investing.

From a financial perspective, dividends represent a way for a company to return profits to its shareholders, usually in the form of cash or stock

Typically, a dividend strategy focuses on stocks with a core metric of "high dividend yield," aiming at companies that are financially stable, possess ample cash flow, have low price volatility, and a history of sustained high dividends.

The dividend yield itself can be broken down into "dividend rate / Price Earnings ratio (PE)," suggesting that the allure of dividend investing rests on two fundamental aspects:

First, it involves earning returns through company dividends over the long term, and second, it entails taking defensive positions or seeking corrective profits during phases of market undervaluation.

It's not hard to see that "dividend yield" serves as one of the most critical pricing systems for dividend assetsHistorical analyses indicate a strong correlation between dividend yield and the market performance of low-volatility dividend assets in subsequent years, showing that as the dividend yield increases, potential future price appreciation follows suit.

However, given that the excess returns from dividend assets have persisted for over three years, assessing the future investment value of dividend funds undeniably requires a careful consideration of price space

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For example, the current dividend yield of the CSI Dividend Low Volatility Index stands at 5.15%, remaining above the central level witnessed during the past decade, indicating a favorable investment deal in this regard.

US Treasury Yield: A More Reliable Relative Return Indicator.

Since 2016, as the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect have opened, the impact of foreign capital on China's market has notably increasedThis change has led to a certain positive correlation between long-term US Treasury yields and the excess returns of low-volatility dividend assets, with this relationship becoming increasingly tightened in recent years.

Firstly, with US Treasury yields as the anchor for global asset pricing, an increase undoubtedly puts pressure on overvalued sectors, while leaving low-volatility dividend assets relatively untouched.

Secondly, the high overseas market interest rates aren't friendly towards long-term assets, particularly emerging markets; in this landscape, short-term assets hold a distinct advantage in terms of certainty, with dividend assets providing the most reliable short-term cash flow, setting themselves apart from more fragile investments.

Given the persistently high US Treasury yields, the dividend low-volatility assets, following adjustments, have turned out to be quite attractive at this moment.

Market Congestion: An Influential Market Sentiment Not to be Underestimated.

In a market defined by existing competitions, the prevailing sentiment has become an invisible force influencing price movements

Investors frequently echo the sentiment of avoiding crowded tradesNevertheless, whether a market is 'crowded' isn't merely a matter of perception; it requires concrete indicators and data.

From a quantitative perspective, the current level of congestion in dividend investing has receded from historical peaks back to central levels, optimizing the allocation valueIn light of the ongoing fundamental bottoming-out, combined with the emotional swings and the complexities of fund dynamics, the allocation advantages of dividend assets have once again surfaced in the current phase.

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Revisiting the Current Logic of Dividend Strategy Allocation.

First, the dividend strategy has historically shown a high success rate.

A high dividend invariably signifies a company's long-term stable profitability and cash flow, resulting in more certain long-term returns

Upon examining the annual performances of the CSI Full Dividend Index against the CSI 300 Index over the past decade, we can observe:

Three historical uptrends in the A-share market: from September 2006 to October 2007, from February 2016 to November 2017, and from January 2021 to August 2021, further reinforce that sectors with high dividend-related weights have significantly outperformed.

Second, high dividend assets possess the capability to weather market cycles.

A notable assertion from Siegel in "The Future for Investors" argues that the higher the dividend yield, the shorter the time investors require to recoup their losses.

Surprisingly, due to accelerated reinvestment of dividends, the greater the price drop, the shorter the time required for investors to recover.

Third, dividend funds inherently embody the strategic advantage of a barbell investment approach.

From an asset allocation perspective, dividend funds generally concentrate on investments with high dividends, high Return on Equity (ROE), low valuations, and large market capitalizations, thus naturally providing a synergistic advantage when paired with growth-oriented tech stocks.

On one end of the barbell strategy lies the primary line of the new cyclical rise, symbolizing the forward direction of China's industries; conversely, the opposite end consists of low-volatility dividend assets that help diminish portfolio volatility through high-dividend fixed-income assets.

Fourth, dividends may be evolving into a medium- to long-term investment logic.

Firstly, in recent years, the uncertainties domestically and internationally have increased dramatically, particularly with the macroeconomic fluctuations and heightened geopolitical risks making it challenging for market risk appetites to remain high for prolonged periods

In this backdrop, dividend assets, with their relative certainty, have gained increasing appeal.

Secondly, regulatory agencies have actively encouraged listed companies to increase their dividend payouts in recent years, leading to a steady rise in both the number and amount of dividends in the A-share market, creating a favorable environment for dividend investmentAdditionally, with policies reducing debt, high-yield municipal bonds are gradually exiting the market, further enhancing the value of dividend assets.

Furthermore, in a declining interest rate environment where yields on 10-year government securities have fallen below 2%, the attraction of long-term government bonds to long-term capital is significantly weakened, while the yield income from dividend strategies stands out starkly

Therefore, for funds seeking stable returns, the increased appetite for high-dividend segments may be difficult to reverseIn fact, following the accelerated decline in government bond yields, the 'hidden line' of high-dividend assets is gradually unfolding.

In the medium to long term, the logic for high-dividend companies remains prevalent; with long-term rates at low levels, dividend assets still constitute a foundational choiceAs market preferences evolve, and with the increasing attention towards corporate governance, the new wave of dividend investment strategies appears poised for continued relevance.

Indeed, as asset allocation faces the imperatives of a low-interest-rate era demanding heightened investment value, and as regulatory guidance aligns with market preferences, the investment time for the dividend style remains far from over.