The 2022 dividend index king has returned, and since the beginning of the year, it has bucked the trend and achieved positive returns of over 8%, outperforming the Wind All-A Index by 25 percentage points. When it comes to dividend strategies or high dividends, the market usually labels them as “bear market defense”, “debt-like assets”, and “low valuation”. Are these conventional impressions true? How can we play with high dividends?

In this dividend strategy, we will focus on solving three problems: first, the cognitive misunderstanding and pricing logic of high dividend strategy; second, the timing of dividend index from top to bottom; dividend strategy returns.

core point

(1) A few common misunderstandings about high dividends:

First, the long-term performance of the dividend index is average? ——The investment value is prominent after considering dividends and reinvestment. The long-term performance of the dividend index seems to be average, but if the dividend reinvestment income is considered, it can outperform most broad-based indexes; and compared with other indices, the dividend index has lower volatility, smaller drawdown, and a more attractive risk-return ratio. force.

Second, defensive or offensive? – High dividends are not a purely defensive strategy. The impression of bear market defense is more due to the low valuation + low volatility of high-dividend assets, but for high-dividend dominance, the bear market environment is neither sufficient nor necessary. In bull markets and volatile markets, high-dividend assets can also obtain excess income.

Third, pro-cyclical or counter-cyclical? ——High-dividend assets have a certain pro-cyclicality. High-dividend strategies are not typical hedging strategies during economic downturns. On the contrary, most high-dividend assets are pro-cyclical. Cyclical manufacturing and financial real estate have always been the “core circle” of high-dividends. The industry attributes of high-dividend assets are more pro-cyclical. main.

Fourth, is a high dividend a low valuation? – Similar but different, with lower volatility. For a long time, high dividends have been significantly correlated with the trend of low valuation styles, and the correlation coefficient has even reached 80%-90%. However, compared with low valuation styles, the trend of high dividends is more stable, and the long-term low volatility attribute is prominent.

Fifth, are high dividends a debt-like asset? – Short duration assets may be more accurate. Although high dividends are a long-term commonality, the periodic outperformance of high dividends is more due to their industry attributes, and the valuation basis of such assets is more derived from short-term cash flow discounting, which has obvious short-duration attributes. Therefore, The period of rising interest rates is actually more beneficial.

(2) When will the high dividend strategy outperform?

Since 2010, there have been roughly 10 high-dividend outperforming periods. Combined with the historical review, the following conclusions can be roughly sorted out:

First of all, two points should be made clear about the logic of the high-dividend strategy: First, high-dividend assets are essentially a type of short-duration assets, which will benefit more during periods of rising interest rates and low valuations; second, high-dividend assets The continued dominance of the strategy is inseparable from the structural market situation of the weight industry itself. Whether it is the macro environment, performance level, or profit-making effect, it actually points to the fact that financial real estate or cyclical manufacturing should have phased advantages.

Secondly, to grasp the high dividend dominant market, we should focus on the superposition of the following types of environments: 1) At the macro level, focus on two types of environments: one is that PPI and PMI are rising at the same time, and monetary conditions have tightened marginally; the other is PPI and PMI At the same time, it is down, and the margin of monetary conditions is loosening. 2) At the performance level, focus on two types of structures: one is that the profit cycle of all A is turning down in an all-round way; the other is that the profit cycle is up, but financial real estate/cycle manufacturing is relatively dominant. 3) In terms of market performance, we should pay attention to two types of situations: one is the sharp correction in the market, and the characteristics of the “bear market” are prominent; the other is the dominant stage of low valuation style during the period of rising interest rates.

Finally, from a long-term perspective, the high-dividend investment value of A-shares is worth paying attention to: first, the thickening effect of dividend reinvestment on long-term investment returns cannot be ignored; Have value for money.

(3) At the current stage, how to choose the best dividend strategy?

“High dividend + fundamental improvement” may be a better solution. In view of historical experience, the staged dominance of high-dividend strategies is actually inseparable from the style dominance of high-dividend industries. Therefore, stock selection criteria that superimpose high dividends and fundamental characteristics are expected to help us outperform the market in the long run while taking into account low volatility. and low drawdown. The backtest results show that the “high dividend + fundamental improvement” combination has consistently outperformed the CSI Dividend Index in recent years, and the drawdown is smaller than that of the fundamental improvement combination alone. Among them, the “high dividend + fundamental improvement” combination of 20 has The annualized return from 2010 to the present is 14.81%, which is higher than the 3.50% of the CSI Dividend Index. (Enclosed is a list of 20 combinations of high dividend + fundamental improvement)

The following is the text part:

1. Some common misunderstandings about high dividends

1.1 Is the long-term performance of the dividend index average? ——The investment value is highlighted after considering dividends and reinvestment

The long-term performance of the dividend index seems to be average, but if the dividend reinvestment income is considered, the dividend index has been able to outperform most indices in the past decade or so; and compared with other broad-based indices, the dividend index has lower volatility and greater drawdown. Small, the risk-benefit ratio (Sharp ratio) is more attractive.

From a long-term perspective, dividend strategies that consider dividend reinvested income outperform most broad-based indices. Since 2010, if the CSI Dividend Index is observed alone, the long-term advantage is not obvious, but if the dividend reinvestment is considered, the excess return has become more significant. Since 2011, the cumulative returns of CSI Dividend, CSI All Index and CSI 300 have reached 215.5%, 124.2% and 119.0% respectively. Specifically, looking at the separation of capital gains and dividend reinvestment, and roughly using an annualized perspective, the annualized rate of return brought by dividend reinvestment is about 4.7%, which is even higher than the 3.1% annualized rate of return of capital gains. Reinvestment is an important support for high dividend strategies to obtain long-term excess returns.

Second, the low drawdown and low volatility advantages of high dividend strategies increase long-term allocation value, and the Sharpe ratio is relatively dominant. From historical experience, after considering the return volatility and maximum drawdown, comparing the return volatility, maximum drawdown and Sharpe ratio of CSI Dividend and each A-share core index since 2010, the CSI Dividend Index has performed better. Gaining returns while maintaining low volatility, and the largest drawdown since 2010 and 2016 is the smallest, reflecting the comparative advantage of high-dividend strategies with long-term low volatility and low drawdown, and the long-term performance of the Sharpe ratio is considerable .

1.2 Defense or Offense? – High dividends are not a purely defensive strategy

High-dividend assets have always been dubbed defensive attributes, and their characteristics of “stable high dividends + high safety margins” are safe havens for funds during bear markets. Starting from the definition of high-dividend assets, on the one hand, stable high-dividends can hedge capital gains losses with the attribute of “just exchange” to a certain extent. On the other hand, relatively low valuation and low volatility attributes also give high-dividend strategies relatively low potential returns. Therefore, the high dividend strategy is logically given a strong “defensive attribute”.

However, the high dividend strategy is not a purely defensive strategy. In addition to the characteristics of low volatility and low drawdown during the bear market, the dividend index can also obtain excess returns in many other market environments. Based on historical experience, in 2015-2016, 2018 and the recent period of substantial market drawdown, the CSI Dividend Index did indeed obtain relatively obvious excess returns, and the “defensive” attribute is fully displayed. Beyond that, however, 2009, 2011, 2014, 2017, 2020, and 2021 all saw high-dividend assets outperform, and the duration is also worth participating. In addition, under the turbulent downturn in 2012, the high-dividend strategy was basically ineffective. Therefore, the bear market environment is neither sufficient nor necessary for the high-dividend strategy. In the bull market and the volatile market, high-dividend assets can also obtain excess dividends. income.

1.3 Pro-cyclical or counter-cyclical? ——High-dividend assets have a certain pro-cyclicality

In the composition of the dividend index, cyclical manufacturing is the largest, accounting for more than 50%, followed by financial real estate. Taking the constituent stocks of the CSI Dividend Index as a sample, the so-called high dividend targets have long been concentrated in the cyclical manufacturing sector, and the proportion once reached 77% in 2008. However, high-dividend assets are not static. With the expansion and enrichment of A-shares, the proportion of cyclical manufacturing has declined in a trend, and the proportion of financial real estate has steadily increased. It has risen from 7% in the early stage to 25%, while the growth of consumer medicine and technology sectors The proportion is relatively stable and has been at a low level for a long time. Going down to the industry level, the early high-dividend assets were mostly concentrated in the transportation, steel, coal, chemical, automobile, and public utilities industries. Then, the weight of banks and real estate gradually increased, and the weight of transportation, chemical industry, and steel gradually fell. By the end of 2021, the top five weighted industries for CSI dividends are real estate, banking, coal, transportation and automobiles.

Therefore, the high-dividend strategy is not a typical hedging strategy during the economic downturn. On the contrary, most high-dividend assets have a certain pro-cyclicality. To sum up, although the industry distribution structure of high-dividend assets has been adjusted, cyclical manufacturing and financial real estate have always been the “core circle” of high-dividend assets. The industry attributes of high-dividend assets are more pro-cyclical. The so-called counter-cyclical inherent The impression is that high dividends are more defensive in a bear market driven by an economic downturn.

1.4 Are high dividends a low valuation? – Similar but different, with lower volatility

For a long time, high dividends and low valuation styles have a very high correlation in trend. Comparing the relative return trends of low price-earnings ratio, low price-book ratio and CSI dividend, the trend correlation of the three has been relatively significant. Since 2010, the correlation between low PE, low PB style excess return and CSI dividend excess return has reached 90.8 respectively. % and 81.8%. This feature is actually evident in the stock selection criteria of CSI Dividend. Since “dividend rate = dividend per share / closing price” can be further processed into “dividend rate = dividend rate / price-earnings ratio”, the relatively low valuation is also It has become the natural attribute of high-dividend assets, so the core of high-dividend outperformance reflects the market’s increased holdings of low-valued assets to a certain extent.

However, high dividends and low valuations are similar but different, and the low volatility attribute of high dividends is more prominent. According to historical experience, volatility is the main difference between the two styles of high dividends and low valuations. The correlation between the two is basically maintained at more than 90% in the normalization stage, and the periodic decline in correlation is generally due to the excess of the low valuation style. fluctuation. At the same time, compared with the high volatility of high/low valuation style switching, the trend of high dividends is more stable, and the trend of low valuations is dominant. In fact, high dividends are generally difficult to outperform low valuations, but low valuations obviously underperform. At this stage, the relative return of high dividends is more resistant to decline, and the long-term low volatility attribute is prominent.

1.5 Are high dividends a debt-like asset? – Short duration assets may be more accurate

In theory, stable high dividends directly generate interest on benchmark bonds, and falling interest rates should boost the cost-effectiveness of high-dividend asset allocation. The judgment of bond-like attributes is mainly due to the fact that high-dividend assets can provide stable cash dividends and directly provide stable interest returns to the underlying bond assets. Therefore, in the stage of downward interest rate trends, high-dividend assets with high “interest” should also be more attractive. In the stage of rising interest rates, the price-performance ratio of high-dividend assets should also be significantly weaker, and the price-performance ratio of bonds will be higher.

However, the probability of high dividends outperforming during the period of falling interest rates is not high, on the contrary, rising interest rates are more conducive to outperforming high dividend strategies. Combined with historical experience, the high-dividend strategy’s stage of obtaining excess returns is not closely related to long-term interest rates. , but the long-term interest rates are all in the upward stage, so the perception of debt-like bonds based solely on dividend benchmarking interest is also slightly one-sided.

We believe that it may be more accurate to consider high-dividend assets as short-duration assets than the definition of debt-like assets. Although high dividends are the long-term commonality of high-dividend assets, the staged outperformance of high-dividends is more due to their industry attributes, that is, the industry characteristics of cyclical manufacturing and financial real estate. Except for the period of large economic fluctuations, such assets are estimated The value basis is more derived from short-term cash flow discounting. Compared with technology growth assets, it has obvious short-duration attributes, so the period of rising interest rates is actually more beneficial. Judging from the experience since 2010, whether in terms of returns or winning rates, whether in absolute levels or relative levels, the performance of high dividends in periods of rising interest rates is better than periods of falling interest rates.

2. When will the high dividend strategy outperform?

How is the high dividend outperforming stage defined? Taking the CSI Dividend Index as a reference, synthesizing absolute returns and relative returns, taking into account the duration of the interval (not less than one month), screening the interval where the CSI Dividend Index closed up and outperformed all A, and defined it as high Dividend outperforming stage, then since 2010, there are roughly 10 such ranges:

Throughout the previous high-dividend outperforming stages, there are roughly the following characteristics:

First, in terms of style, it is generally accompanied by a structural market dominated by financial real estate and cyclical manufacturing. Compared with multiple rounds of high-dividend outperformance, the market style will generally be biased towards financial real estate or cyclical manufacturing, technology growth tends to perform poorly, and consumer medicine will only be relatively dominant in February-April 2021. At the same time, considering the distribution of advantageous industries in the stage, the relative dominance of high-dividend industries such as banking, real estate, coal, and steel is an important support for the relative dominance of the current high-dividend strategy. Therefore, whether the market style is conducive to financial real estate or cycle manufacturing will be an important clue to grasp the high dividend market.

Second, from the perspective of performance, most of them are in a period of downward profit or a period of upward profit in which “financial real estate + cyclical manufacturing” dominates. Combined with the growth rate of all-A performance, the performance cycle can be divided into the upward period/downward period of profit. At the same time, combined with the estimation of the performance growth rate of different sectors, the performance structure can also be included in the observation. Historical experience shows that the high-dividend outperforming stage often exists in two types of environments. First, when the all-A performance enters a stage of declining profitability, the market’s expectations for high growth rates weaken, and relatively stable and high-dividend assets begin to suffer. The second is when the performance of all-A is in the upward stage, and financial real estate or cyclical manufacturing shows a higher performance growth rate, which in turn leads to the pursuit of high growth rate and high dividend assets.

Third, in terms of the macro environment, “PPI-PMI same as above + wide currency” and “PPI-PMI same as above + tight currency” are more conducive to high dividend dominance. Combining the perspectives of PMI-PPI and currency-credit, most high-dividend outperforming stages often face a combination of two types of environments, namely “PPI down year-on-year + PMI down + wide currency” or “PPI up year-on-year + PMI up + tight currency”, The two types of combinations actually roughly correspond to the two types of macro environment in which financial real estate and cyclical manufacturing are relatively dominant: when the PPI and PMI decline synchronously year-on-year, it is actually in an obvious “recession-like” stage, and the corresponding loose money has actually reflected Therefore, financial real estate will take the lead in reflecting the expectation that the economy has bottomed out and stabilized, and then catalyze the relatively dominant market style of financial real estate; when PPI and PMI rise in tandem year-on-year, it means that the economy continues to improve, but The rise in volume and price also means the emergence of inflationary pressures, and the marginal tightening of superimposed currencies also means that policies begin to respond to potential inflation. At this time, the technology sector will be the first to be under pressure, and the consumer sector will be subject to the support of rising CPI. Cost pressure, and upstream resources will fully benefit from the logic of bulk price increases, which will lead to the main line of the market biased towards cyclical manufacturing.

In conclusion, combined with the historical experience of high dividend strategy outperforming, the following conclusions can be roughly summarized:

First of all, two points should be made clear about the logic of the high-dividend strategy: First, high-dividend assets are essentially a type of short-duration assets, which will benefit more during periods of rising interest rates and low valuations; second, high-dividend assets The continued dominance of the strategy is inseparable from the structural market situation of the weight industry itself. Whether it is the macro environment, performance level, or profit-making effect, it actually points to the fact that financial real estate or cyclical manufacturing should have phased advantages.

Secondly, to grasp the high dividend dominant market, we should focus on the superposition of the following types of environments: 1) At the macro level, focus on two types of environments: one is that PPI and PMI are rising at the same time, and monetary conditions have tightened marginally; the other is PPI and PMI At the same time, it is down, and the margin of monetary conditions is loosening. 2) At the performance level, focus on two types of structures: one is that the profit cycle of all A is turning down in an all-round way; the other is that the profit cycle is up, but financial real estate/cycle manufacturing is relatively dominant. 3) In terms of market performance, we should pay attention to two types of situations: one is the sharp correction in the market, and the characteristics of the “bear market” are prominent; the other is the dominant stage of low valuation style during the period of rising interest rates.

Finally, from a long-term perspective, the high-dividend investment value of A-shares is worth paying attention to: first, the thickening effect of dividend reinvestment on long-term investment returns cannot be ignored; Have value for money.

3. At the current stage, how to choose the best dividend strategy?

At the current stage, for the dividend strategy, we recommend the stock selection logic of “high dividend + expected improvement”. In view of historical experience, the staged dominance of high-dividend strategies is actually inseparable from the style dominance of high-dividend industries. Therefore, stock selection criteria that superimpose high dividends and fundamental characteristics are expected to help us outperform the market in the long run while taking into account low volatility. and low drawdown.

Definition of “high dividend + expected improvement” combination:

1) For the improvement of fundamental expectations, focus on two dimensions, “performance exceeding expectations” and “analyst earnings forecast revisions”. First, for performance exceeding expectations, in the previous report “Constructing an Exceeding Expectation Portfolio: Based on Performance + In “Stock Selection Strategy for Volume and Price” (20210906), we describe the company’s performance exceeding expectations based on the two dimensions of historical performance and volume and price signals. Here, the definition of exceeding expectations is used as one of the screening conditions for the improvement of the company’s fundamentals. Second, for analysts’ earnings forecast revisions, in the previous report “How Can Analysts Help Us Predict the Economy & Beat the Market?” ” (20220403), we pointed out that the analyst’s earnings forecast revision indicator (MAF) can reflect the marginal change in the company’s earnings forecast. Briefly, if an analyst raises (or lowers) a company’s earnings forecast at a certain point in time, it is reasonable to believe that the analyst captures new information that affects the company’s long-term performance, and the magnitude of the upward (or downward) adjustment reflects the The extent to which fundamentals expect marginal changes. Therefore, we choose the MAF indicator as another screening condition for fundamental improvement, that is, the number of times that analysts have downgraded earnings in this period is 0, and the number of times that analysts have raised earnings accounted for more than 90%. To sum up, the construction method of fundamental improvement is as follows: the condition of “performance exceeding expectations” is the main condition, supplemented by the condition of “analyst earnings forecast revision”, and when the number of selected stocks with “performance exceeding expectations” is small, the The stocks screened by “Analyst Earnings Forecast Revision” are supplemented.

2) For high dividend screening, we select companies with a dividend yield of more than 3% in the past 12 months;

3) For the constituent stocks of the portfolio, at the beginning of each period, select the top 20 or 40 high-dividend-yielding fundamental-improving stocks to form the current investment portfolio, which are defined as the “fundamental improvement + high-dividend” 20 combination and “fundamental improvement” respectively. “Improvement + High Dividend” 40 combination.

The backtest results show that the combination of “high dividend + fundamental improvement” has consistently outperformed the CSI Dividend Index in recent years, and the drawdown is smaller than that of the fundamental improvement combination alone. Whether in terms of annual returns or monthly returns, the combination of “improved fundamentals + high dividends” is significantly better than the CSI Dividend Index. Among them, the “high dividend + improved fundamentals” 20 combination has an annualized return of 14.81% from 2010 to the present , higher than the 3.50% of the CSI Dividend Index. In addition, compared with the pure fundamental stock selection method, the combination of “high dividend + fundamental improvement” has a smaller drawdown, and the drawdown can be controlled within -24% since February 2016, while the combination of “performance exceeding expectations” The drawdown can reach -34%, and the “Analyst Earnings Forecast Revision” portfolio can draw back -30%.

risk warning

1. Unexpected fluctuations in the macro economy; 2. Insufficient comparability of historical experience; 3. Errors in statistical models.

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