Dividend stocks that outperformed in the first half of the year

Since the beginning of the year, US stocks, led by AI technology stocks such as NVIDIA, have been leading globally. In the Hong Kong stock market, high-dividend stocks with stronger growth certainty are leading the pack. For example, the Hang Seng Dividend ETF (159726) has risen by over 21% since the beginning of the year, and the Hong Kong state-owned enterprise dividend ETF (513910) issued in February this year has also risen by over 16%. Dividends and AI were the two main investment themes last year. Looking back, it is clear that after the hype around domestic AI stocks last year, the so-called AI stocks in China are lagging far behind the AI technology stocks in the US. On the contrary, the dividend theme, which was initially not favored by the market, has been gaining more traction. Why is the logic behind dividend stocks becoming more popular? This is a change in investment paradigm and an evolution in market perception of dividend stocks.

I. Dividend Stocks in a Volatile Market

Looking back at last year, the initial reaction was of course to buy high-elasticity consumer/AI stocks, which were given high expectations. When everyone had strong expectations for returns, naturally not many people paid attention to the strength of high-dividend stocks. However, as economic data verified over several months, the expectations of strong returns were reversed by reality. In other words, after some funds lost money in AI and consumer stocks, more people were willing to understand the logic behind dividend stocks and gradually accepted the fact that there was no strong rebound on a macro level. In fact, the investment logic of dividend stocks is not difficult to understand. In a phase of slowing macroeconomic growth, the revenue growth of most companies also slows down, corresponding to a decrease in investment returns and certainty in the overall environment. In this kind of environment, companies with countercyclical properties such as CNOOC, the three major telecom operators, China Shenhua, and CNNC stand out. These companies have a monopolistic business model, with no need to worry too much about demand and competition. Although the growth rate is not fast, it is stable enough, the balance sheet is healthy, and the annual disposable cash flow is sufficient to increase shareholder returns. Especially after the introduction of market value management KPIs last year, state-owned enterprises have more incentive to increase shareholder returns. The stereotype of dividend stocks is high dividend yield and slow stock price growth, but under the current macro cycle and market aesthetics, the steady rise based on high shareholder returns has made dividend stocks the market's favorite.

Of course, it cannot be denied that dividend stocks have less elasticity compared to technology stocks, but they are stable enough, and the returns from slow growth are not insignificant. The first half of the year is the best example. For instance, in April, the Hang Seng Technology Index rose by over 25% in just one month, while the dividend ETF rose by 16% during the same period. However, in the recent Hong Kong stock market correction, the dividend ETF had a significantly smaller pullback, so much so that over the past two months, the dividend stocks have outperformed the Hang Seng Technology Index, albeit with slightly weaker elasticity.

For example, the recent short-term reversal in the real estate sector this year, indeed the real estate sector rebounded by 40% in two weeks, but it is currently approaching the level before the market rally started Investors deeply understand this point. Nowadays, it is much more difficult to invest, and the market is often short-term. Even if you speculate and experience a round of pullbacks, the returns are not small. If you cannot catch the market trend before it starts on the left side, making money is much harder than stable dividend stocks. Therefore, from the perspective of holding experience, dividend stocks are more suitable for individual investors at the current stage. Second, how long can dividend stocks last? In addition to the downward trend in social asset yield mentioned above, from the perspective of large funds, since both bonds and fixed income have fallen below a 3% yield, and even Yu'ebao has fallen below 1.5%, the available asset allocation options for individual investors and large institutions such as insurance companies are becoming fewer and fewer, known as the concept of "asset shortage." The main incremental funds in the stock market this year are large institutions such as insurance companies. The main reason insurance companies buy stocks is to look for companies with stable growth and strong earnings certainty, which this year are mainly state-owned enterprise dividend stocks. More importantly, the current domestic interest rates are in a downward cycle. Since the end of 2020, the 10-year national bond yield has dropped from 3.3% to 2.26%, and the speed of the national bond yield decline is very fast. In the environment of interest rate cuts, insurance institutions have no choice but to increase their holdings of high-yield stocks, which is one of the reasons why high-yield stocks led the market in the first half of the year. Of course, after the sharp rise in dividend stocks this year, investors inevitably worry about the excessive increase and fear a big drop in the future, so they dare not buy. This can be judged by national bond yields and macroeconomics. In fact, if we overlay the trend of H shares CNOOC with the 10-year national bond index, the two trends are very close. If the bond yield continues to decline and the dividend yield of high-yield stocks is higher than the national bond yield, conservatively speaking, with a safety margin of 4-5% or more, the risk is not significant, and it will continue to attract large funds to allocate dividend stocks. Especially with social residents' deposits repeatedly hitting new highs and local government bond issuance rates continuously hitting new lows, these are potential funds, proving that risk-free assets of 4-5% or more are favored by funds. Although the central bank recently borrowed bonds from banking institutions to short national bonds, the main purpose was to control the speed of the yield decline to protect the depreciation of the exchange rate. Although the central bank borrowed bonds for a day, the national bond index quickly rose back up To be honest, in the absence of major changes in the macroeconomy, the probability of government bond yields declining is high. Human intervention can only slow down the rate at which bond yields decline, and cannot directly reverse the trend! So, when will bond yields rise again, possibly putting downward pressure on dividend stocks? That would be when the macroeconomy improves, when most funds believe that economic growth will exceed expectations, and funds may then withdraw from dividend stocks and turn to assets more sensitive to the macroeconomy. However, for now, such a phenomenon has not yet appeared. Furthermore, even if such a phenomenon occurs, it is unlikely that government bond and fixed income yields will return to the era of 2.5-3% or higher. For individual investors, placing money in Yu'ebao with a 1.5% interest rate, high dividend stocks are still worth long-term allocation. It is worth noting that from a cost-effective perspective, investing in H-share dividend stocks may be better than A-share dividend stocks. Especially with the support of mysterious funds in A-shares, the premium gap between A/H-share dividend stocks is getting larger. Taking CNOOC as an example, since the beginning of the year, H-share CNOOC has risen by nearly 90%, currently with a dividend yield of 5.3%, higher than the 4.3% of the 10-year US Treasury bond. At the beginning of the year, the dividend yield of H-share CNOOC was close to around 10%. A-share CNOOC currently has a dividend yield of 3.5%, with a rise of 63% since the beginning of the year, and the current discount of H-shares is 38%. For example, China Mobile in the Hong Kong stock market has a dividend yield of around 6%, while A-share China Mobile has a dividend yield of 4%, with a discount of 35% for H-shares. Due to the premium gap between A/H shares, if you want to invest in cost-effective Hong Kong dividend stocks, you can use ETFs to cover a wide range of Hong Kong dividend stocks. The Hang Seng Dividend ETF (159726) and the Hong Kong Central Enterprise Dividend ETF (513910) have both risen by more than 15% this year. In the new era of "asset shortage," dividend stocks are still gradually being recognized, and most dividend yields are currently far ahead of government bond yields. It's not too late to get on board now **

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