pokernet| When does dividend style dominate? The latest interpretation of Huang Zhi of CITIC Prudential Fund

Dividend investment, as its name implies, is an investment strategy with dividend yield as the core stock selection index. its goal is to find listed companies that can continue to provide higher dividends. These companies usually have a more mature business model, stable profitability and sufficient cash flow, and can have a better ability to resist risks when the economy fluctuates.

In recent years, with the increase of the uncertainty of internal and external macro environment, deterministic assets have been paid more and more attention by investors, and the dividend style has strengthened for three consecutive years. Under the new normal of economic development, with the decline of the expected rate of return on investment, investors may gradually shift from the pursuit of "high growth" to the pursuit of "certainty". Hope to get a relatively stable and reasonable return by holding a more deterministic target for a long time. The pursuit of certainty may become a long-term trend of investor preference. People pay more and more attention to dividend investment, and they are also very concerned about whether the dividend style can be sustainable and in what market environment it may be dominant. Here we take the CSI dividend index as the representative of the dividend style, review and analyze its historical performance, there are the following aspects of income characteristics are more noteworthy.

In the long run, the dividend style has an advantage over the whole market.

From the perspective of historical performance, after considering the dividend income, the CSI outperformed the CSI for a long time after 2026, and the volatility and pullback of the CSI were relatively lower, and the risk-return ratio was more attractive. From the long-term perspective, the dividend style has a certain advantage over the market in most of the time. In the past 12 years, the dividend total income index outperformed the total income index in 8 years, and the dividend style continued to strengthen in the past three years.

FigurePokernetIndex cumulative rate of return

Is the dividend strategy a pure bear market defense strategy?

"dividend yield = dividend per share / share price = dividend ratio / price-earnings ratio", dividend assets have a higher dividend yield, usually accompanied by the attribute of low valuation. Therefore, in the traditional perception of investors, dividend strategies are often labeled as "bear market defense". In history, however, in the dominant stage of dividend style, there are both rising and fluctuating and falling situations in the market, that is to say, dividend style may provide some defense not only in a bear market, but also in a bull market or a volatile market. Dividend assets are also likely to obtain relative market excess returns.

From the perspective of several historical stages in which the dividend style is dominant, the market is in a declining stage in 2018 and 2022-2023, and the CSI dividend index obtains obvious excess returns relative to the market, showing a strong defensive attribute. However, in part of the time when the market is in the rising stage (such as the beginning of 2016, the end of 2014 and the second and third quarters of 2021), or the market is in a volatile stage (such as the second half of 2013 and 2017, August-November 2020), the CSI dividend index can also earn excess returns during the period.

Figure: dividend style relative to the dominant range of the market (red indicates market rise, green indicates decline, blue indicates shock)

What is the relationship between the dominance of dividend style and the trend of interest rate?

In the traditional impression of investors, dividend assets can provide relatively stable and high dividends, have the nature of "quasi-bonds", and improve the performance-to-price ratio of dividend asset allocation in the interest rate downward period, so the downward interest rate is likely to be good for dividend style performance. In fact, is this the case? We can also verify it from historical data.

Figure: dividend style performance in different interest rate trends (average daily excess return)

Since 2012, we have divided the market into interest rate upward period and interest rate downward period according to the 10-year maturity yield of Chinese government bonds. From the perspective of relative yield, in the interest rate downward stage, the dividend style is higher relative to the market and the growth style, which is consistent with investors' impression that the dividend style is negatively related to the long-end interest rate. Dividend style and growth style often have seesaw effect. From the relative strength of the two, we can see that dividend style and long-term treasury bond interest rates show a negative correlation most of the time. However, there is also a positive correlation in some periods (such as November 2016 to August 2017, June 2019 to February 2020).

Figure: relative performance of interest rate trend (reverse order) and dividend style (red indicates interest rate upward period, others are interest rate downward period)

In recent years, with the improvement of the internationalization of A-share market, the correlation between dividend style performance and US debt interest rate has also increased. The rise in US bond interest rates means that overseas liquidity is tightening and investment risk appetite is being suppressed. Dividend assets of A shares are mostly distributed in coal, electric power, steel, transportation, banking, real estate and other cyclical industries. Compared with growth stocks, their valuation duration attributes are shorter, and the upward valuation of US debt interest rates is less affected. Relatively more favored by funds. Therefore, in recent years, there is a strong positive correlation between the domestic dividend style and the interest rate of US debt.

Picture: after 2015, there is a strong positive correlation between A-share dividend style and US debt interest rate.

Conclusion

Dividend style has continued to strengthen in recent years, and investors are more concerned about the market environment in which dividend style may be dominant. Through a retrospective analysis of the historical performance of the CSI dividend index, we can find the following characteristics: different from the impression of investors that "dividend assets are only suitable for bear market defense", in the stage in which dividend style is dominant, the market falls, fluctuates or rises at the same time, but the market falls mostly. In recent years, with the improvement of the level of internationalization of A-shares, the influence of overseas liquidity on A-share risk preference has been enhanced, and there is a strong positive correlation between domestic dividend style and US debt interest rate. on the other hand, the impact of domestic long-end interest rate on dividend style is mostly from the perspective of "bond" pricing, showing a certain negative correlation in most of the time.

The analysis of historical performance can help investors better understand the characteristics of dividend style investment, but past experience can not represent the future, so it is difficult to play a short-term game on dividend style. However, we believe that the asset allocation value of dividend investment strategy always exists, and dividend style is an investment field worthy of investors' persistent research and long-term concern.

Author: Huang Zhi

Bachelor of Mathematics and Applied Mathematics, Peking University, Master of Applied Mathematics, Peking University.

At least 12 years experience in securities and fund industry. He has worked for China International Capital Corporation and Ping an Securities.

He joined CITIC Prudential Fund in June 2015 and has served as a financial engineer and assistant fund manager. He has served as a fund manager since July 2018. He is currently a fund manager of 9 funds including CITIC Prudential State-owned Enterprise Dividend Quantitative Stock Selection and CITIC Prudential China Securities 500.

(Note: The fund manager does not make any recommendations on the sectors/industries mentioned, does not represent any investment advice or recommendation, and does not represent the fund's position information or trading direction.)

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