summary
The overall cash dividend ratio of A-share listed companies was slightly lower than that of Hong Kong stocks. It was 38% and 40% for FY2022, respectively. The higher dividend ratio for Hong Kong stocks was due to lower valuations. As of the end of March 2024, the average dividend rate of Hong Kong stocks was 4 times that of A-shares, and the average dividend ratio of A/ Hong Kong stocks of companies listed in Hong Kong and Hong Kong at the same time was 2 times that of A-shares. In the long run, out of the high-dividend companies listed in A/Hong Kong and Hong Kong at the same time, fewer than ten have outperformed A-shares since 2023.
As of the end of March 2024, out of 32 high-dividend companies since 2019 (A-share dividend ratio of ≥ 3% at the end of the previous year, same in this paragraph), only 4 Hong Kong stocks had higher yields than A-shares, and since 2023, only 9 Hong Kong stocks had superior earnings among 55 high-dividend companies.
In the long run, the dividend strategy only outperforms the market when the growth style dominates significantly. Since 2019, the A-share dividend index has been more profitable and less volatile. The China Securities Dividend Index and Hang Seng High Dividend Ratio Index represent the dividend index of A shares and Hong Kong stocks. Since 2014, the A-share dividend index has only outperformed the benchmark China Securities 800 in 2019 and 2020; among them, A-shares have continuously outperformed Hong Kong stocks since 2019. By the end of March 2024, the average annual yield of the A-share dividend index was 6%, an average higher than that of Hong Kong stocks by 11pct. The average annual yield of the A-share dividend index was 5-7pct higher than the price index during the same period; the average annual volatility of the A-share dividend index during the same period was 17%, lower than the Hong Kong stock 3pct.
In terms of individual stocks, as of the end of March 2024, in years with a non-dominant growth style (2014, 2016-2018, 2024), A-share high-dividend rate companies had the best performance, and the average yield of the five groups in descending order of dividend rate declined sequentially. The top 20% segment had the highest average return, about 5.5%. In contrast, although Hong Kong stocks also have high dividend rate premiums, the higher the dividend rate, the better. Since 2018, the average return in the 20%-40% subgroup has been the highest. Group 0.8 pct
Looking at stages, generally in the early stages of a reversal in the Hong Kong stock market, the Hong Kong Stock High Dividend Index will outperform the A-share dividend index, but it will not outperform the Hang Seng Index. This period lasted an average of about 1-3 months. The average return on the Hang Seng High Dividend Ratio Index was 15-25pct higher than the CSIC dividend and 5-12pct lower than the Hang Seng Index. Judging from the calendar effect, high dividend strategies increase their win rate in some months, and often perform well at the end of the year. In 2014-2023, the months with the A-share dividend index were in March and November, with an average win rate of 60%-80% and an average monthly yield of about 3%-4%; in February, April, and November-December, the average positive yield was 60%-80%, and the average monthly yield was about 1%-4%.
From a financial perspective, the high-dividend sector is an important base position for absolute income capital (insurance/social security positions are 5-60%). Public equity fund positions account for less than 20% but continue to increase positions. Northbound capital positions account for about 30%; Hong Kong Stock Connect positions are slightly lower with higher dividends. In the A-share market, individual shares with a dividend rate of at least 3% are used as the high-dividend sector. By the end of September 2023, 60% of insurance capital positions were in the high-dividend sector, with a scale exceeding 320 billion yuan (7 becoming banks). 50% of social security fund holdings had high dividends, and the scale exceeded 200 billion yuan (8 became banks).
By the end of 2023, the high-dividend sector of public funds held more than 790 billion yuan, with positions of about 17%, up 10 pcts from the end of 2021, but it was still 9 pcts lower than the total market capitalization ratio; Land Stock Connect's high-dividend holdings exceeded 62 billion yuan, with positions of about 31%, overallocation of 5 pcts. In the Hong Kong stock market, as of the end of March 2024, Hong Kong Stock Connect funds held about 4.8% of Hong Kong stocks with a dividend rate of at least 9%, which is less than the corresponding company's share of 0.8 pct in the total market value of Hong Kong Stock Connect.
Since the 2018 market dividend reform, the long-term return of the A-share dividend index since 2019 is superior to that of Hong Kong stocks; in contrast, the dividend ratio of Hong Kong stock assets is higher. The phased elasticity of the high dividend index is superior to A-shares in the early stages of the reversal of Hong Kong stocks, and the long-term average return of companies with higher average dividend rates above the middle (not the highest) is superior to that of companies with high dividend rates. Looking forward to the future, we believe that as the new “National Nine Rules” drive the transformation of the domestic capital market more into an investment market, we can still look forward to subsequent incremental policies in terms of entering the market and enhancing the internal stability of the market, and the dividend strategy is expected to spread further. The characteristic earnings advantages of A-shares compared to Hong Kong stocks are expected to continue. In the context of dividend system reform, it is recommended to focus on sectors with superior dividend levels (banks/petrochemicals/coal, etc.) and enterprise sectors (resources/exports, etc.) where dividends or profits have room for improvement. In contrast, Hong Kong stocks are more attractive to insurance funds that value high dividends and preferential tax holdings for a long time. Investment suggestions prefer individual stocks based on expectations of dividends and valuation growth.
The following is the main text:
In recent years, regulations have continued to guide and encourage listed companies to improve the level and quality of dividends, and market attention to dividend strategies has increased. On April 12, 2024, the State Council issued “Certain Opinions on Strengthening Supervision and Risk Prevention to Promote High-Quality Development of the Capital Market” (the new “Nine National Rules”), which clearly targets improving the quality of listed companies, increasing the entry of medium- and long-term capital into the market, and enhancing the internal stability of the capital market. Among them, in terms of strengthening the supervision of cash dividends from listed companies, companies are encouraged to increase dividends, clearly link dividends to ST, and increase incentives for companies with high-quality dividends; in terms of guiding medium- to long-term capital entry into the market, the policy clearly supports “long-term investment”. It will establish a rapid ETF approval channel, optimize the insurance equity investment environment, and encourage banks to actively participate in the capital market.
Earlier, on December 15, 2023, the China Securities Regulatory Commission issued the “Listed Company Regulatory Guidelines No. 3 - Listed Company Cash Dividends (2023 Revision)” and the “Decision on Amending the 'Guidelines for Listed Companies'” to further clarify and encourage cash dividend orientation, simplify the mid-term dividend procedure, promote further optimization of dividend methods and rhythm, and encourage listed companies to increase the frequency of cash dividends, guide the formation of mid-term dividend habits, and stabilize investors' dividend expectations. In the context of dividend system reform, market attention to dividend strategies has increased markedly. This report will explore the cost performance ratio of dividend investment from a comparative perspective between A-shares and Hong Kong stocks.
1. Market basis: A/The Hong Kong dividend payment rate is close to 40%, and the high dividend rate of Hong Kong stocks stems from lower valuations
Compared with the dividend characteristics of A-shares and Hong Kong stock listed companies, the overall dividend payment level of the two places is close, around 40% in 2022, but the average dividend ratio of Hong Kong stock companies 1 is about 4 times that of A-shares, which means that the relatively higher dividend rate of Hong Kong stocks is mainly due to lower valuation levels.
First, in terms of the overall level of dividends, the overall cash dividend ratio of A-share listed companies was slightly lower than that of Hong Kong stocks. It was 38% and 40% for FY2022, respectively. According to Wind data, using FY2022 dividends as a statistic, more than 3,500 companies implemented dividends in FY2022, and the total annual cumulative dividends accounted for 38% of the total net profit achieved by dividend companies. Over the same period, more than 900 Hong Kong stock companies implemented dividends in FY2022, and the total annual cumulative dividends accounted for 40% of the total net profit achieved by dividend companies; structurally, the number of companies with an annual cash dividend ratio greater than 40% for A-shares accounted for 36% of the total number of dividend companies.
In terms of dividend continuity for listed companies, the number of A-share and Hong Kong stock companies that achieved dividends for three consecutive years (between 2020-2022) accounted for 69% and 77% of the total number of companies implementing dividends in FY2022, respectively, at a high level of around 70% to 80%. Also, using dividends for the period from the first quarter report to the third quarter of 2023 as a statistical measure, the number of A-share companies that paid dividends at least once in the first three quarters of 2023 was 4.9%, compared to 16.3% for Hong Kong stocks during the same period. The two changed by +1.7 pct and -0.1 pct, respectively, compared to the same period in 2022.
Second, in terms of dividend rates, the average dividend rate of Hong Kong stock listed companies is 4 times the level of A shares, and the dividend ratio of companies listed in Hong Kong A at the same time is about 2 times. As of the end of March 2024, the average dividend rates of A-shares and Hong Kong stock listed companies were 1.8% and 7.1%, respectively. The average dividend ratio of Hong Kong Stock Connect constituent stocks during the same period was 5.8%, which is 3 times the level of A-shares. Judging from groups with relatively high dividend ratios, the dividend rate levels for A-shares and the Hong Kong stock market with the highest 10% dividend ratio levels were 4.0% and 13.2%, respectively. Hong Kong stocks were about 3.3 times that of A-shares; the dividend ratio for A-shares and Hong Kong stocks with the highest 20% dividend ratio was 2.5%, respectively. 7% and 9.7%. Hong Kong stocks are A-shares Approximately 3.6 times. For companies listed at the same time in A/Hong Kong, as of the end of March 2024, the average dividend rate for A-share companies was 2.9%, and the average dividend rate for Hong Kong stock companies was 5.4%, which is about 2 times that of A-shares.
Third, in terms of dividend income tax costs, holding A shares for at least one year is zero, the comprehensive tax rate for Hong Kong Stock Connect individual investors is 20%-28%, and Hong Kong Stock Connect mainland resident enterprise investors 2 who have held H shares for 12 months are exempt from corporate income tax. For A-share investments, the tax deduction process for dividend income calculates the tax rate cost based on the length of time the stock is held, divided into time intervals of less than 1 month, 1 month or more, and 1 year or more, corresponding to the tax rates of 20%, 10%, and 0%, respectively. For investment in Hong Kong stocks, dividend tax deduction has a fixed tax rate for all investors who have held shares. Among them, individual investors from the Mainland who invest in Hong Kong stocks through a Hong Kong Stock Connect account are generally subject to personal income tax at a rate of 20%. In particular, if a red chip listed company pays dividends without accounting for corporate income tax, the comprehensive tax rate on dividend income for individual investors is 28%.
Investors of mainland enterprises that invest in Hong Kong stocks through the Hong Kong Stock Connect account are included in their total income and are subject to corporate income tax according to law. In particular, dividend dividend income obtained by mainland resident enterprises holding H shares for 12 consecutive months is exempt from corporate income tax according to law; those investing in Hong Kong stocks through local individual investor accounts (using the QDII quota of mainland institutions) are generally not required to pay dividend tax. In particular, dividends paid by red-chip listed companies without corporate income tax are also taxed at 10%. A 10% tax deduction is required.
2. Historical review: Since 2019, A-shares have had higher earnings and lower volatility compared to Hong Kong stocks
2.1 Company perspective: A shares and Hong Kong stocks all have high dividend rate premiums, but Hong Kong stocks do not mean that the higher the dividend rate, the better the return
First, according to group statistics, according to whether to pay dividends, the excess income of A-share dividend companies fell from an average of 10.2 pct in 2017-2020 to -5.8 pct between 2021 and 2023, while the excess income of Hong Kong stock dividend companies fell from 13.9 pct to -1.3 pct during the same period. Considering the availability of data, the next year's rise and fall of companies with or without dividends is counted separately. In the ten years of 2014-2023, the average yield of A-share dividend companies was higher than that of unpaid companies. The average annual average of excess earnings in these four years was 10.2 percentage points, lower than the average excess earnings of Hong Kong stock dividend companies 3.7 percentage points during the same period; in contrast, Hong Kong stock dividend companies had excess income for 7 years. These are the annual average of excess earnings for the two time periods between 2016 and 2020 and 2022 - 2023, respectively. They were 13.0 percentage points and 3.4 percentage points, respectively.
Second, the statistics are grouped according to whether the dividend ratio has increased. Compared with individual stocks that have increased the dividend ratio of A shares and Hong Kong stocks, the average excess income over the next year will be 1-2 percentage points. Considering the availability of data, the annual dividend ratio is counted separately as to whether the annual dividend ratio increases the company's next year's rise and fall rate. In the ten years from 2014 to 2023, the average annual yield of companies that increased the A-share dividend ratio was 1.6 percentage points higher than that of companies that did not increase the dividend ratio. The average annual excess income of the Hong Kong stock dividend ratio increased by 1.3 percentage points during the same period. Among them, the dividend ratio increase premium for A-shares was relatively high between 2017 and 2020, with an average premium of 5.2 percentage points; the average increase in the dividend ratio for Hong Kong stocks between 2016 and 2019 was about 11.1 percentage points, while the average premium fell to 3.7 percentage points between 2022 and 2023.
If we consider the market's advance game, separately count whether the annual dividend ratio increased the company's rise and fall rate in the year of dividends. In the 10 years from 2013 to 2022, the average increase or decrease rate of companies that raised the A-share dividend ratio in the same year was 3.6 percentage points lower than that of the company's dividend ratio. The average increase in the Hong Kong stock dividend ratio during the same period was 0.8 percentage points higher than that of companies that did not raise the company's excess income; among them, only in 2017 and 2018, the average increase in the company's excess income was 2.2 percentage points; Hong Kong stocks in 2016- 2016 Companies that increased their dividend ratio in 2020 and 2022 all had excess income, with an average excess of 9.4 percentage points.
Third, according to the dividend rate ranking, the average earnings of A-share companies with high dividend rates all performed well in non-growth years. The Hong Kong stock market did not mean that the higher the dividend rate, the better the earnings performance. The top 20% quantile high dividend ratio companies lag behind the average revenue of the 20%-50% subgroup by about 1 pct. Dividend rates at the end of the year above are ranked, and the average annual rise and fall of individual stocks in each 10% segment between 2014 and 2024 is counted separately. As of the end of March 2024, the average earnings performance of individual stocks with high dividend rates in the A-share market was superior in 2014, 2016-2018, and 2024, and the positive correlation between dividend rate ranking and average earnings ranking is obvious.
Over the same period, the Hong Kong stock market showed that the average return of individual stocks with high dividend rates outperformed individual stocks with low dividend rates. Compared with the average earnings of the top 20% high-dividend rate group, the annual average of excess earnings of the 20% lower dividend rate group was about 10 percentage points; however, unlike A-shares, in the Hong Kong stock market, the average earnings ranking after ranking by dividend rate was scattered, and Hong Kong stocks did not perform as well as the higher the dividend rate. As of the end of March 2024, in the 8 years since 2017, some years showed 6 sequential dividend rate cuts Average of individual stocks ranked in the 20%-40% subgroup Earnings are higher than the average earnings of individual stocks with high dividend rates in the top 20% quantile. The average annual excess return is 1.1 percentage points. This means that the highest dividend rate in the Hong Kong stock market may have an “undervaluation trap.”
For high-dividend companies listed on both A-shares and Hong Kong stocks, the number of companies that have outperformed A-shares in Hong Kong stock yields since 2023 is only about 16%. As of the end of March 2024, from the perspective of more than 5 years since 2019, of the 32 companies listed in Hong Kong A with an A-share dividend ratio of at the end of 2018, only 4 companies had a cumulative increase or decrease in the Hong Kong stock range higher than that of A-shares during the same period. Among them, Yankuang Energy's H shares had the highest excess yield compared to A-shares, about 212%.
From the perspective of more than 3 years since 2021, among the 35 companies listed in Hong Kong A with an A share dividend rate of at least 3% at the end of 2020, the cumulative rise and fall in the Hong Kong stock range of 12 companies was higher than that of A-shares during the same period. Among them, Yankuang Energy, CNPC, and Huadian International's H shares had higher excess returns compared to A-shares, 171%, 82%, and 49%, respectively; from the perspective of more than 1 year since 2023, out of 55 Hong Kong companies listed in Hong Kong A and Hong Kong with an A-share dividend rate of at the end of 2022, only 9 of the 55 Hong Kong companies listed in Hong Kong A and Hong Kong Cumulative increase in the stock range The decline was higher than the rise and fall of A-shares during the same period, and the average excess earnings were 2-16pct.
2.2 Index review: Since 2019, A-shares have performed better than Hong Kong stocks in the long term. Short-term games can focus on the calendar effect
To make it easier to compare the performance of A-shares and Hong Kong stock dividend strategies, this report selected the China Securities Dividend Index to represent the A-share dividend strategy, and the Hang Seng High Dividend Ratio Index represents the Hong Kong stock dividend strategy. The sampling method for both indices was to select securities of listed companies with relatively high dividend rates within the sample space as index sample 4.
2.2.1 Basic characteristics of the dividend index
Judging from the basic characteristics of the index, most of the constituent stocks of the A-shares and Hong Kong dividend indices are distributed in the banking and energy industries, and state-owned enterprises both account for close to 90% of the market value. First, compared with the distribution of the two constituent stocks, looking at the share of the total market capitalization of listed companies, the China Securities dividend constituent stocks were concentrated in the banking, petroleum and petrochemical, coal, utilities, and transportation industries. CR5 was 90% higher in the banking, petroleum and petrochemical, communications, coal, and utilities industries, and CR5 was 90%. Among them, the market value of listed companies in the petroleum, petrochemical and communications industries was 16 and 16 percent higher in the Hang Seng High Dividend Index, respectively. points. Second, looking at the classification of constituent stock companies, as of the end of March 2024, judging from the total market capitalization share of listed companies, all state-owned enterprises accounted for 89% of the market capitalization of the China Securities Dividend and Hang Seng High Dividend Ratio Index.
Among them, central enterprises account for 88% of the total market capitalization in the Hong Kong Stock Dividend Index, which is 16 percentage points higher than the share of A-shares. Third, looking at the dividend rate comparison between the two, the Hang Seng High Dividend Index dividend rate began to be significantly higher than the China Securities dividend since 2015, and is currently about 40% higher on average. As of the end of March 2024, the China Securities Dividend Index had a dividend rate of 5.4% for the past 12 months, and the Hang Seng High Dividend Ratio Index had a dividend rate of 7.7%, 1.4 times that of the China Securities Dividend Index. The multiple between the two was 88% in the five-year rolling history. Fourth, judging from the dividend rate premium compared to treasury bond interest rates, the China Securities Dividend Index has had a stable positive dividend rate premium over 10Y interest rates since the second half of 2018, and reached an all-time high of about 4.2 pct in the second half of 2022. Currently, the China Securities Dividend Index dividend rate premium is 3.1 pct, which is at the 70% quantile level for nearly 5 years. Since the second half of 2014, the Hang Seng High Dividend Ratio Index has had a stable positive dividend rate premium over the 10Y Chinese Treasury Bond Interest Rate. The overall trend is similar to the China Securities Index, and reached a record high of around 6.9pct around November 2022. Currently, the index's dividend rate premium is 5.4 pct, which is at the 80% quantile level for nearly 5 years.
2.2.2 Long-term market characteristics of the dividend index
From a long-term perspective of more than 10 years since 2014, there is a positive correlation between the dividend index trends of A-shares and Hong Kong stocks. However, since 2019, the trend differentiation and fluctuation between the two indices has increased, and A-shares have shown the advantage of higher income flexibility and less fluctuation compared to Hong Kong stocks.
First, in terms of the correlation between A-share and Hong Kong stock trends, the average 250-day rolling correlation coefficient between 2014 and 2018 was 0.75, and the average has dropped to 0.59 since 2019. According to statistics on the rolling 250-day correlation coefficient of the A-share Hong Kong stock index over the past ten years, the linkage between A-shares and Hong Kong stocks was strong. The average correlation coefficient between China Securities Dividend and Hang Seng High Dividend Ratio Index was 0.75, and the average correlation coefficient between China Securities 800 and Hang Seng Index was 0.7 during the same period; however, after 2019, the correlation coefficient between Hong Kong A and Hong Kong increased markedly. By the end of March 2024, the average correlation coefficient between the two market dividend indices fell to 0.59, lower than the correlation coefficient of the market benchmark index. The period around mid-2022 fell to the ±0.2 range, and the divergence of high-dividend strategy trends between A-shares and Hong Kong stocks increased; until 2023, the correlation gradually returned to the 0.6-0.8 range.
Second, in terms of index earnings, the A-share dividend index continuously outperformed Hong Kong stocks in 2019, and the average annual yield was about 11 percentage points higher than Hong Kong stocks. For more than ten years since 2014, the A-share dividend index has had no excess returns in 2019 and 2020. Relatively sluggish dividend strategy performance is usually accompanied by a sharp rise in growth stocks. Looking at the horizontal comparison, the China Securities Dividend Index is more flexible than the Hang Seng High Dividend Rate Index. In the ten years from 2014 to 2023, the annual yield of the China Securities Dividend Index was 8.4%, higher than the benchmark China Securities 800 Index 4.4pct; during the same period, the annual yield of the Hang Seng High Dividend Ratio Index was -1.6%, which is 1.5 percentage points of annualized excess return compared to the benchmark Hang Seng Index.
Looking at the vertical comparison, the Hong Kong Stock Dividend Index performed better in 2016-2018. The Hang Seng High Dividend Ratio Index outperformed the China Securities Dividend Index for three consecutive years, with an average annual yield of 7.6% and -3.1% respectively; however, since 2019, the A-share dividend index has continued to outperform Hong Kong stocks. By the end of March 2024, the average annual yield of the China Securities Dividend Index was 6.1%, which is about 11 percentage points higher than the Hang Seng High Dividend Ratio Index (annualized -5.1%). Also, after considering dividend reinvestment, the full income index earnings performance of the Hong Kong stock dividend strategy improved compared to the price index. In 2014-2023, the annualized return of the Hang Seng High Dividend Rate Full Income Index was 5.1%, which is higher than the annualized yield of its price index of 6.7 percentage points.
Third, in terms of risk fluctuations, the average annualized volatility of the A-share dividend index since 2020 is about 3 percentage points less than the Hong Kong Hang Seng High Dividend Ratio Index. In terms of index volatility, as of the end of March 2024, the annual average annual volatility of the A-share and Hong Kong stock dividend indices since 2020 was 17% and 20%, respectively; previously, the average values for the period 2014-2019 were 21% and 16%, respectively.
In terms of index retracement, the maximum retracement of the A-share dividend index in five years was less than that of Hong Kong stocks. The biggest retracements of the A-share and Hong Kong stock dividend indices in the past five years (between 2019 and 2023) were -24% and -46% respectively. The two market benchmark indices China Securities 800 and Hang Seng Index had maximum retracements of -38% and -53% respectively during the same period.
2.2.3 Characteristics of the dividend index phased market
Judging from monthly performance, the dividend index for A-shares and Hong Kong stocks has basically been close to the number of months with positive returns since 2014, accounting for about 54%-55%. The average monthly earnings of A-shares is slightly higher than 0.7 pct of Hong Kong stocks, and the average monthly annualized volatility is slightly higher than 1pct of Hong Kong stocks. In the 123-month period from January 2014 to March 2024, the number of months with positive returns for A shares and Hong Kong shares was 55% and 54%, respectively, with average monthly returns of 4.6% and 3.9%, respectively, and average monthly annualized fluctuations of 16.2% and 15.2% respectively; the proportion of months with both positive absolute returns and positive relative returns during the same period was 34% and 30%, respectively. The average monthly yield was 4.63% and 4.17%, respectively. The average monthly excess yield was 2.58% and 2.50%, respectively. The rates were 16.3% and 15.8%, respectively.
In addition, judging from the phased performance, the Hong Kong stock dividend index generally outperformed A-shares during the period when the risk was cleared. Compared with the A-share dividend index, the excess earnings of the Hong Kong stock dividend index averaged about 15-25 percentage points, and the average continued for about 1-3 months. However, at this stage, the Hong Kong stock dividend index did not outperform the market benchmark index, and the Hang Seng High Dividend Ratio Index's earnings lagged behind the Hang Seng Index by an average of about 5-12 percentage points.
First, from November to December 2020, benefiting from positive progress in global COVID-19 vaccine research and vaccination, boosted confidence in economic recovery. Risk assets rebounded sharply, and the more undervalued Hong Kong stock high dividend rate index rose 11 percentage points higher than the A-share dividend index in the first phase of the rebound, which lasted about a month and a half. From December 1, 2020 to January 21, 2021, the China Securities 800 and Hang Seng Index rose 10.5% and 13.6% respectively. The China Securities Dividend Index bucked the trend and fell, with a cumulative decline of 2.9%. The Hang Seng High Dividend Ratio Index rose 8.3% during the same period. Although it outperformed the Hang Seng Index by 5.3 pcts, it had an excess income of 11.3 pcts compared to the China Securities Dividend Index. At this stage, the leading internal shares of the Hang Seng High Dividend Ratio Index are concentrated in industries related to global recovery expectations, such as shipping and ports, industrial parts and equipment. Since then, from January 22, 2021 to May 27, 2021, when the dividend strategy trend was rising, the A-share and Hong Kong stock dividend strategy indices gradually established an excess advantage over the market benchmark index, and the A-share dividend index gradually outperformed the Hang Seng High Dividend Ratio Index. At this stage, the China Securities 800 Index rose 10.2%, and the China Securities 800 Index fell 3.0% during the same period; the Hang Seng High Dividend Ratio Index rose 9.5%, and the Hang Seng Index fell 2.7%.
Second, starting in November 2022, it benefited from the gradual clarification of domestic policy direction, continued strengthening of expectations for the resumption of economic activity, and equity assets bottomed out and rebounded. The cumulative increase of the Hong Kong Stock High Dividend Ratio Index within two and a half months in the first phase was 25 percentage points higher than the A-share dividend index. From November 1, 2022 to January 17, 2023, the China Securities 800 and Hang Seng Index rose 14.6% and 46.9% respectively. The China Securities Dividend and Hang Seng High Dividend Ratio Index rose 10.3% and 35.4% respectively during the same period. Neither of these outperformed the market benchmark, but the Hang Seng High Dividend Ratio Index achieved an excess income of 25.1 pct compared to the China Securities Dividend Index. Since then, during the general market shock period from January 18, 2023 to May 8, 2023, the A-share and Hong Kong stock dividend strategy indices had an excess advantage over the market benchmark index, and the A-share dividend index gradually outperformed the Hang Seng High Dividend Ratio Index. The China Securities 800 Index rose by 12.4% during this period, and the China Securities 800 Index fell 0.9% during the same period; the Hang Seng High Dividend Ratio Index rose 5.8%, and the Hang Seng Index fell 5.9%.
2.2.4 The calendar effect of the dividend index
The calendar effect of the retrading dividend strategy on the A-share and Hong Kong stock markets. In terms of comprehensive absolute returns and relative returns, the months that generally perform well in the A-share market are concentrated in March and November; the periods that performed well in the Hong Kong stock market were February, April, and November-December. According to the statistics on the monthly earnings performance of the China Securities Dividend Index and the Hang Seng High Dividend Index in the decade 2014-2023, the average frequency of positive absolute returns and positive excess returns in March and November was around 60%-80%. The average monthly returns of the corresponding indices were 3.0% and 4.1%, respectively. Compared with the average excess earnings of China Securities 800, they were 1.9 pct and 1.4 pct, respectively. The Hang Seng High Dividend Ratio Index had a relative advantage in the early to late year period. The average frequency of positive returns in February, April, November, and December was around 60%-80%. The average monthly returns of the corresponding indices were 1.2%, 3.1%, 3.6%, and 1.8%, respectively, and the average excess returns were 2.4 pct, 1.1 pct, 0.4 pct, and 0.7 pct, respectively. Among them, the frequency of excess returns positive in February was 70%, and the frequency of positive excess returns in April, November, and December was about 50%-60%.
3. Capital structure: insurance/social security overallocates high dividends, public funds continue to be underallocated but have increased positions
In the A-share market, long-term capital such as insurance/social security is overallocated to high-dividend sectors (listed companies with a dividend rate of 3% or more), and their holdings are concentrated in the banking industry, while public funds continue to be underallocated to high-dividend sectors.
> Insurance funds: The high-dividend sector accounts for nearly 60% of positions, and 70% of high-dividend positions are concentrated in the banking industry. According to Wind data, as of the end of September 2023, insurance funds held more than 550 billion yuan in the A-share market (excluding the insurance group's holdings of subsidiaries), of which listed companies holding dividend rates of 3% or more exceeded 320 billion yuan, accounting for 59% of total insurance holdings. During the same period, medium- and high-dividend companies of all listed companies accounted for about 24% of the total market value. Judging from the internal structure of high-dividend insurance holdings, banking companies account for about 71% of high-dividend positions, while utilities, non-bank finance, real estate, and transportation industries account for an average of 2%-8% of high-dividend holdings. Looking at the historical perspective, the medium and high dividend positions of insurance holdings have fluctuated upward since 2015, and high dividend positions have remained around 60% since the third quarter of 2022.
> Social security funds: The high-dividend sector accounts for nearly 50% of the holdings, and more than 80% of high-dividend holdings are concentrated in the banking industry. According to Wind data, as of the end of September 2023, the Social Security Fund's heavy stock holdings in the A-share market exceeded 400 billion yuan. Among them, listed companies with a dividend ratio of 3% or more held more than 200 billion yuan, accounting for 49% of the total social security heavy holdings, which is higher than the total market value of high-dividend companies in the market during the same period. Judging from the internal structure of social security high-dividend heavy stocks, banking companies account for about 82% of high-dividend holdings, followed by coal industry companies accounting for about 3% of high-dividend holdings. Looking at the historical perspective, the positions of heavy stocks of social security funds in the high-dividend sector have remained around 45%-55% since the third quarter of 2022.
> Public funds: The high-dividend sector accounts for only 17% of positions, which is 9pct lower than the market value of listed companies. By the end of 2023, public funds held more than 4.6 trillion yuan in A-share listed companies, of which high-dividend companies with dividend rates of 3% or more exceeded 790 billion yuan, accounting for about 17%. The total market value of companies with lower dividends accounted for about 9 percentage points (26%) of the total market value of all listed companies, but it was about 4 percentage points higher than the high dividend position (13%) of public funds at the end of June 2023. Looking at some of the industries in the high-dividend sector, the top five largest industries are banking, pharmaceutics, coal, non-bank finance, and household appliances. High-dividend companies in related industries account for 17%, 9%, 8%, 7%, and 6% of all high-dividend holdings, respectively. Looking at the historical perspective, the magnitude of the low dividend sector of public funds narrowed between 2016 and 2017. Among them, the share of high dividend sector companies held by public funds reached 7.8%, 10.6%, and 10.7% of total holdings in the 2016 interim report, 2016 annual report, and 2017 interim report respectively. Compared with the low allocation margins of the total market value of high-dividend sector companies during the same period, they were -8.1 pct, -5.2 pct, and -2.6 pct, respectively.
> Northbound capital: The high-dividend sector accounts for about 30% of positions, which is 2 pct higher than the market value of listed companies. As of April 12, 2024, Land Stock Connect held more than 2.1 trillion yuan in A-share listed companies. Among them, the size of high-dividend companies with dividend ratios of 3% or more exceeded 630 billion yuan, accounting for about 30%, and the total market value of high-dividend companies accounted for about 2 percentage points (28%) of the total market capitalization of all listed companies; within high-dividend holdings, the banking, household appliances, and utilities industries accounted for the highest share of holdings, at 24%, 15%, and 8%, respectively. Previously, at the end of 2023, Land Stock Connect held more than 620 billion yuan of high-dividend companies, accounting for 31% of total holdings, accounting for 5 percentage points higher than the total market value of the high-dividend sector.
In the Hong Kong stock market, there is no clear sign that Hong Kong Stock Connect funds have been overallocated to high-dividend individual stocks. As of the end of March 2024, individual stock holdings with a dividend ratio of 9% or more were about 4.8%, slightly lower than the corresponding company's total market value accounting for 5.6%; individual stock holdings with a dividend rate of 6% or more accounted for about 45.5%, and the corresponding listed company's total market value accounted for 48.5%.
4. Investment outlook: Increased policies encourage companies to pay dividends, and can be expected to allocate incremental capital with high dividends
Based on the previous analysis, the long-term return elasticity of the A-share dividend index is superior to that of Hong Kong stocks, and overall capital liquidity is also relatively superior; in comparison, the dividend ratio of Hong Kong stock assets is higher. Structurally, the earnings performance of companies with medium to high dividend ratios is superior. The Hong Kong stock high dividend index is generally stronger than the short-term elasticity of A-shares at the beginning of the overall reversal of the Hong Kong stock market.
Historical experience shows that the dividend strategy only outperformed the market benchmark in years where the growth style was significantly superior. Since 2019, the A-share dividend index has had higher returns and lower fluctuations compared to the Hong Kong stock dividend index; judging from the performance of high-dividend individual stocks, the average yield of A-share companies in the 5th class of dividend rate has declined sequentially, but Hong Kong stocks are not the ones with higher dividend rates, the better. Since 2018, Hong Kong stock dividend rates rank the absolute highest in the 20%-40% subgroup; from a financial perspective, the high-dividend sector has the absolute highest average return on capital income. The important bottom position (insurance/social security position is 5- 60%). Public equity fund positions account for less than 20% but have continued to increase positions. Northbound capital positions are about 30%, and Hong Kong Stock Connect holdings are slightly lower with higher dividends.
Looking forward to the future, we believe that as the new “National Nine Rules” drive the transformation of the domestic capital market more into an investment market, subsequent incremental policies can still be expected in terms of medium- to long-term capital entry and enhance the internal stability of the market. In the context of dividend system reform, it is recommended to focus on sectors with superior dividend levels (banking/petroleum and petrochemicals/coal/utilities, etc.) or companies with room for improvement in dividends; in contrast, Hong Kong stock investment suggestions combine dividend and valuation growth expectations to prefer Alpha companies with high dividend levels.
From a policy perspective, on April 12, 2024, the State Council issued the new “Nine National Rules” for the capital market, namely “Certain Opinions on Strengthening Supervision and Risk Prevention and Promoting High-Quality Development of the Capital Market”. Among them, in terms of strengthening the supervision of cash dividends from listed companies, increasing incentives for listed companies' dividends, linking dividends to ST, and taking more measures to increase dividend rates; enhance the stability, sustainability, and predictability of dividends; and promote dividends more than once a year, pre-dividends, and pre-Spring Festival dividends. According to the rules of the Shanghai and Shenzhen-North Exchange, for main board companies, if the net profit for the most recent fiscal year and undistributed profit in the parent company's statements are positive, the total cumulative cash dividend for the last three fiscal years is less than 30% of the average annual net profit for the last three fiscal years, and the cumulative dividend amount for the last three fiscal years is less than 50 million yuan, ST will be implemented. For GEM and science and technology innovation board companies, the absolute dividend value standard will be adjusted to 30 million yuan.
At the same time, Science and Technology Innovation Board and GEM companies whose cumulative R&D investment in the last three fiscal years accounted for 15% or more of the cumulative revenue or R&D investment amount of 300 million yuan or more in the last three fiscal years are exempt from implementing ST. At the same time, it is stipulated that the repurchase cancellation amount is included in the calculation of the cash dividend amount. In terms of vigorously promoting the entry of medium- and long-term capital into the market, it is required to vigorously develop equity funds to greatly increase the share of equity funds; establish a rapid approval channel for ETFs to promote the development of indexed investment; optimize the insurance fund equity investment policy environment, implement and improve the performance evaluation methods of state-owned insurance companies to better encourage long-term equity investment; improve the supervision system of insurance fund equity investment and optimize the information disclosure requirements of listed insurance companies; improve the investment policy of national social security funds and basic pension insurance funds; increase the flexibility of corporate pension and personal pension investment; encourage bank financial management and trusts The capital actively participates in the capital market, increases the scale of equity investment, etc.
Judging from current practice, the full application of IFRS9 accounting standards in insurance companies is expected to further enhance insurance capital's allocation preferences for high-dividend assets. Starting in fiscal year 2023, insurers will fully implement the two new IFRS9 and IFRS17 standards. Changes in how insurers invest in financial assets will increase the impact of stock price fluctuations in stock assets classified as FVTPL on insurers' profit fluctuations. From the perspective of considering the stability of corporate profits, combined with low central fluctuations in bond interest rates, insurance capital's preference for blue-chip stocks or cash bulls with high dividends, stable dividends and low risk is expected to increase.
At the same time, in recent years, policies have also continued to encourage insurance capital to increase equity asset investment. On September 10, 2023, the State Financial Supervisory Administration issued the “Notice on Optimizing the Solvency Supervision Standards of Insurance Companies”. For insurance companies investing in Shanghai and Shenzhen 300 Index constituent stocks, the risk factor was adjusted from 0.45 to 0.4; on January 12, 2024, relevant spokespersons from the Securities Regulatory Commission said at a press conference that they actively support insurance funds to carry out long-term stock investment pilot projects, China Life Insurance, Xinhua As the first pilot agency, Insurance plans to jointly invest 50 billion yuan to focus on investing in high-quality listed companies in the secondary market. Currently, the project has entered the implementation stage.
Editor/Jeffrey