Chinese investors are rushing into high-dividend stocks to extract whatever returns they can get from equities in a struggling economy, with several market analysts endorsing this defensive strategy.
The CSI Dividend Index - comprised of traditional energy, financial and material companies that yield high dividends - rose 2.6% in the first week of 2024. That compared with a 3% fall in the benchmark index, which booked its worst start to a new year since 2016.
“We saw institutional investors shifting their investments to high-dividend stocks as they look for value and certainty,” said Lei Meng, China equity strategist at UBS Securities, pointing out that confidence in the economy and stock market remains weak.
China’s economy has failed to bounce back since reopening last year after pandemic lockdown, and has grappled with a property crisis, local government debt woe and deflationary risk that have weakened the stock market and dented investor sentiment.
Companies that pay high and steady cash dividends have therefore become attractive to investors looking for high yields. The CSI Dividend Index delivers an average dividend yield of 6.3%, compared with 2.8% for the overall blue-chip CSI 300 companies, showed data from China Securities Index.
Ten-year government bonds deliver yields of 2.5%.
Dividend-themed exchange-traded funds (ETFs) have also been drawing investors over the past four weeks. In the first week of 2024, they received over 2 billion yuan ($279.10 million) of net inflows, compared with 3.8 billion yuan of net outflows from broader equity ETFs, Sinolink Securities said in a client note last week.
The stock price benchmark has booked a cumulative 37% loss since 2020, and ended 2023 as the world’s worst performer among major equity markets alongside Hong Kong’s Hang Seng benchmark, with both down more than 10%. Shaanxi Coal Industry, China Shenhua Energy and Tangshan Port Group - the biggest constituents of the dividend index - are up 7% to 14% so far this year.
Ling Peng, fund manager at HuangYuan Asset Management, who went for high-dividend stocks and made a 7.8% gain in 2023, expects the strategy to continue succeeding in 2024.
Though the share prices of high-dividend companies had risen a lot in the past three years, they are undervalued and some of their yields are at record levels, Ling said.
The CSI Dividend Index trades at a price–to-earnings ratio of 5.9, compared with the CSI 300′s 10.7.
Jason Lui, head of Asia-Pacific equity derivatives strategy at BNP Paribas, said dividends are likely to be an investment theme even in the depressed Hong Kong market.
“If the market is now moving into a rate-cut phase, all of a sudden companies with 7%, 8% dividend will become a very interesting proposition” for investors seeking better returns than what bonds can offer.
Li Bei, founder of Shanghai Banxia Investment Management, in an investor letter this month said she increased dividend stocks in her portfolio on expectations that fresh allocations from insurance companies to the stock market will benefit such companies this year.
“They prefer high-dividend companies,” Li said.
Insurance companies typically take a conservative approach to stock investment. Moreover, China relaxed rules for insurers to invest in stocks late last year to boost the lagging market.
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Chinese investors seek high-dividend stocks as economy flounders - The Globe and Mail
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