High dividend strategy is sought after. Which industries are worth paying attention to?

At the beginning of 2024, the high dividend sector of A-shares continued to thrive. The coal sector had a "strong start" with three consecutive days of gains, while the railway and highway transportation sectors showed strength. Oil and gas stocks rose and then fell, while the power and shipping sectors remained active.

In the midst of the hot high dividend sector, several institutions have pointed out that in an environment of long-term interest rate decline, high dividend assets that combine "high dividends, low volatility, and low valuation" are becoming the focus of attention.

Analysts at Changjiang Securities, including Han Yichao, previously released a report titled "Outlook for High Dividends in 2024: Which Industries Are Worth Paying Attention To".

The report pointed out that the high dividend strategy performs well in the early stage of economic stabilization. In 2024, it is expected that the economy will maintain the current pace of recovery, and the short-term relative value of high dividends will still exist. If the pace of recovery accelerates in the second half, industries with stronger fundamentals in the high dividend sector will have a better chance of experiencing structural rebounds.

Changjiang Securities believes that for the high dividend sector, the market should focus on three main themes:

It is important to clarify that "high dividends ≠ high dividend yield". In order to avoid the value trap problem of the high dividend strategy, the report suggests introducing the dividend payout ratio (cash dividends/net profit) and using "dividend yield + dividend payout ratio" as the criteria for selecting high dividend stocks. In addition, the report recommends focusing on the following three main themes:

1) High dividend opportunities under the theme of state-owned enterprise reform:

In 2024, state-owned enterprise reform will steadily enter a deeper stage. State-owned enterprises themselves have strong dividend payouts. To better grasp the related thematic elasticity, it is recommended to select high dividend stocks with good quality performance in terms of earnings, cash flow, and growth potential, and explore stocks with greater potential. State-owned enterprise dividends have long-term characteristics of lower drawdowns and stable excess returns.

2) "Dividends + Low Volatility", a defensive choice:

For investors with lower risk appetite and volatility requirements, it is recommended to continue focusing on the smooth net asset value curve brought by "dividends + low volatility". This defensive strategy is more prominent in market environments similar to 2022 and 2023.

3) Technological dividends under the AI theme, a combination of offense and defense:

Implement a "dumbbell" strategy of allocating high dividends and TMT (technology, media, and telecommunications) stocks, which is more suitable for volatile markets. From an industry perspective, select stocks with high dividend yields and high dividend payout ratios in the TMT industry to create a dividend portfolio that combines "value" and "growth", seize the beta opportunities brought by the development of the technology industry, and achieve higher return elasticity.

According to Changjiang Securities, the coal, media, transportation, home appliance, and automobile sectors are worth paying attention to:

Coal: Combining high dividends, stable profits, and cyclical advantages, it is both offensive and defensive.

Media: Focus on high dividend tracks such as publishing and gaming.

Transportation: Focus on high dividend and high performance certainty sectors such as highways and railways.

Home appliances: Seize the opportunities of leading companies in mature industries and stable growth with stable returns. Automobile: The cycle of intelligent electric innovation continues to evolve, opening up new opportunities for the industry to go global; both the vehicle and parts sectors have high dividend targets.

Attractiveness of High Dividends

Changjiang Securities points out that from a valuation perspective, the current dividend premium rate is at a historical high, highlighting the long-term value advantage of allocating to high dividend targets:

In 2023, with the overall macroeconomic environment in China expected to be weak and the background of the US Federal Reserve raising interest rates overseas, the index is expected to weaken. High dividend strategies typically have higher certainty of returns, so it is recommended to focus on high dividend strategies at the moment, as the current dividend premium rate is at a historical high. High dividend strategies have an advantage in allocation.

As of December 18, 2023, the difference between the dividend index and the 10-year government bond yield is 4.08%, which is greater than one standard deviation since 2005 and is at a historically high level. At the current point in time, the long-term value advantage of allocating to high dividend targets is evident.

From an economic fundamentals perspective, Changjiang Securities believes that high dividend strategies perform well in the early stage of economic stabilization:

In terms of timing, high dividend strategies have a very obvious pro-cyclical nature, which may be related to the high exposure of the strategy to cyclical industries.

Specifically, based on the three major cycles of prosperity, credit, and interest rates, the absolute returns and Sharpe ratio of high dividend strategies are completely consistent with the order of preference in the three cycles: rising interest rates, expanding credit, and PMI.

From the perspective of the remaining liquidity clock, the absolute returns of the high dividend style mainly come from following the market's beta, while the relative returns mainly come from cost-effectiveness and defensiveness. In 2023, it is in a state similar to "1", "2", "3", which is an economic bottoming state. From the current period to the period of economic recovery, it is still the best time window for the high dividend style to perform.

Three Main Themes of High Dividend Strategy Portfolio

Theme 1: State-owned Enterprise (SOE) Reform + High Dividends, Quality of SOE Dividends

Changjiang Securities believes that in 2024, as the reform of state-owned enterprises enters the next stage, central SOEs, as the "ballast stone" of the national economy, are expected to continue to provide stable investment returns. The overall profitability and dividend levels of central SOEs are significantly higher than the average level of the A-share market. In this context, it is possible to further select stocks with better performance in terms of "dividends" and "quality" from the sample pool of central SOEs to construct a portfolio of high-quality dividends from state-owned enterprises:

In terms of "dividends", stability of the dividend yield and dividend payment willingness of individual stocks are considered. The specific selection criteria are as follows:

(1) Continuous dividends: Stocks that have continuously paid cash dividends in the past three years, and the average dividend payout ratio in the past two years is within a reasonable range;

(2) High dividend and dividend willingness: The average dividend yield and average dividend payout ratio in the past three years are in the top 60% of all A-shares.

In terms of "quality," considering the performance of profitability, cash flow (financial leverage), and growth (SUR), the selected stocks have the following characteristics:

(1) Strong and stable profitability, with high ROE and small ROE fluctuations;

(2) Good cash position, using cash flow/total liabilities to measure the level of financial leverage, selecting stocks with lower leverage to control risks;

(3) Maintaining stable revenue growth, using the SUR index to measure growth potential and explore stocks with greater development potential.

Theme 2: Dividends + Low Volatility, Defensive Choice

Changjiang Securities believes that in addition to the theme, style factors can be added to enhance the defensive ability of dividend strategies. Considering the current market environment and aiming to earn relative returns, to enhance the dividend strategy, the "+ Low Volatility" approach can be used to reduce portfolio drawdown and volatility, and enhance defensive attributes:

Unlike traditional low volatility indices that only consider the volatility indicator of the past year, we also consider the short-term and long-term volatility trends of individual stocks. We use the volatility indicators of the past 1 month, 2 months, 6 months, and 1 year to select stocks with low volatility, taking into account the representation of the portfolio's high dividend and low volatility style characteristics.

Looking at the past 3 years, the Changjiang Dividend Low Volatility has shown an overall upward trend in excess net value compared to the CSI Dividend, and has performed more stable within the market correction range in 2022.

Theme 3: Technology Dividends with "Dumbbell" Structure

Changjiang Securities states that high dividends and TMT (Technology, Media, and Telecommunications) are the two major market focuses in 2023, and combining them forms a "dumbbell" strategy for allocation between high risk and low risk, which is more suitable for volatile markets:

In 2023, among all the primary industries in Changjiang's first-level industry classification, the computer, media, and electronics industries have ranked high in terms of dividend payout ratio, showing significant improvement compared to 10 years ago. Looking at the sub-industries, the dividend payout ratio of information technology and hardware services has also been on the rise since 2020.

Which industries are worth paying attention to under the high dividend strategy?

Coal: High Dividend + Stable Profit + Pro-cyclical, Combining Offense and Defense

Changjiang Securities believes that high dividends are one of the important investment logics in the coal industry: In recent years, as the centralization of coal prices has driven performance growth, increased cash flow for coal companies, and reduced industry capital expenditure needs, listed companies have generally chosen to increase cash dividends as a way to actively reward shareholders. From the perspective of the entire industry, the coal sector ranks first in dividend yield, with an average dividend yield of 8% over the past 12 months.

Highways: Stable dividend returns + mid-term certainty of 10%+ performance growth

Changjiang Securities pointed out that highways, as defensive targets, often have good excess returns during interest rate downturn cycles:

During interest rate downturns, economic growth is often under pressure, while mature highway assets have relatively stable traffic flow and steady profitability, showing strong anti-cyclicality. At the same time, high-quality listed highway companies in China continue to implement high dividend policies, with dividend yields higher than the 10-year government bond yield, significantly improving cost-effectiveness.

Media: Focus on publishing, gaming, and other high dividend tracks

Changjiang Securities pointed out that in the publishing industry:

1. Education publishing companies have high qualification thresholds, stable demand, and high performance certainty.

2. State-owned publishing and distribution companies have low valuations, high dividends, and high cash flows.

3. In the AI era, book publishing companies, with their rich and high-quality content, are expected to realize value reevaluation of their content assets.

In the gaming industry, Changjiang Securities pointed out:

1. The gaming industry has relatively light assets and high gross margins, with abundant cash flow and stable profitability. Some gaming companies maintain a high dividend payout ratio in the long term.

2. The actual sales revenue of the Chinese gaming market is expected to increase by about 14% YoY in 2023, indicating continued growth in the gaming industry.

3. Leading gaming companies have a PE ratio of around 15x in 2024, indicating relatively low valuations.

Home Appliances: Seize the opportunity of leading companies in mature sub-industries and stable growth with stable returns

Changjiang Securities pointed out that some sub-industries in the home appliances sector are gradually entering a mature stage, with an optimized industry structure. The growth stability and profit realization of industry leaders have been strengthened, and they also have strong bargaining power in the industrial chain:

At the same time, with weak expectations for consumption and real estate prospects, the overall valuation of home appliance industry leaders is at a historically low level, with high cost-effectiveness and certainty.

Automobiles: The smart and electric innovation cycle continues to evolve, opening up new opportunities for industry expansion overseas

Changjiang Securities believes that the innovation cycle leads the sector's growth, and the smart and electric innovation cycle in the automotive industry has opened up a new round of growth, bringing new development directions such as intelligence, technology, and electrification. Domestic companies have strong competitive advantages in terms of cost, technology, and response speed. The automotive industry is expected to produce a group of world-class companies in the new era. Textile and Apparel: Prominent High Dividend Attributes in the Sector

Changjiang Securities pointed out that the overall development of the textile and apparel sector is in a mature stage, with a mature business model and stable industry profitability. There is almost no possibility of disruptive growth brought about by technological breakthroughs. Expenditure for expansion/research and development is relatively stable, so the general surplus is usually used for dividends:

The sector's prominent high dividend attributes contribute to a high dividend yield. Since 2017, the cash dividend ratio of the textile and apparel sector has consistently ranked among the top 5 out of the 32 primary industries in Changjiang Securities, and the dividend yield has consistently ranked among the top 6.

The main viewpoints in this article are from the research report "Outlook for High Dividends in 2024: Which Industries and Stocks Are Worth Paying Attention to?" by analysts Han Yichao (SAC: S0490512020001), Chen Jiemin (SAC: S0490512020001), Jin Ning (SAC: S0490518100001), etc., with some deletions made by Wall Street News.