Hang Seng Index Company: Hang Seng High Dividend Yield Index highlights long-term investment value

According to the Wise Finance APP, on October 10th, the Hang Seng Index Company announced that on September 19th (Hong Kong time), the Federal Reserve cut the federal funds rate by 50 basis points to a range of 4.75%-5.00%, marking the first rate cut in over four years. The latest forecast from the Federal Open Market Committee (FOMC) indicates that by the end of 2026, the federal funds rate will be further reduced by a total of 200 basis points to a range of 2.75%-3.00%, signaling the beginning of a rate-cutting cycle. It is worth noting that income-oriented investment focuses on long-term returns rather than market fluctuations, making it one of the investment strategies that seek high total returns and low volatility. The Hang Seng High Dividend Yield Index (HSHDYI) tracks the performance of high-quality companies that maintain stable dividend payouts, reflecting a more substantial long-term risk-adjusted total return (0.44 times, compared to the market's 0.21 times) as of October 4th, with a dividend yield of 5.8%.

Income-oriented investment strategy provides long-term risk-adjusted total return

On September 19, 2024 (Hong Kong time), the Federal Reserve cut the federal funds rate by 50 basis points to a range of 4.75%-5.00%, higher than expected (market expectation was a 25 basis point cut), marking the first rate cut in over four years. The Fed's rate cut this time aims to boost the U.S. labor market, as the FOMC's confidence in inflation moving towards the 2% target has strengthened. Regarding the rate trajectory, Fed Chairman Powell stated that a 50 basis point cut should not be seen as a new pace. It is worth noting that the latest FOMC projections indicate further rate cuts of 50 basis points/100 basis points/50 basis points in 2024/2025/2026, respectively, implying a total reduction of 200 basis points to a range of 2.75%-3.00% by the end of 2026. The rate-cutting cycle may have begun.

Due to the linked exchange rate system, Hong Kong's benchmark interest rate was also cut by 50 basis points, marking the first rate cut in over four years for Hong Kong's benchmark rate. Following the rate cut, the Hang Seng Index rose by 3.2% in the two trading days following (September 19th to 20th), with the performance more pronounced in rate-sensitive sectors. Additionally, after the introduction of new policies in the mainland on September 24, 2024, the Hong Kong stock market further rebounded by 25.3% from September 20th to October 4th.

It is worth noting that income-oriented investment focuses on long-term returns rather than short-term market volatility, making it one of the investment strategies that seek high total returns and low volatility. As of October 4, 2024, the dividend yield of the Hang Seng High Dividend Yield Index was 5.8% (Figure 1), 2.6 percentage points higher than the broader market (represented by the Hang Seng Composite Index (HSCI)). Furthermore, the dividend yield of the Hang Seng High Dividend Yield Index is 2.9 percentage points higher than the yield of Hong Kong's 10-year government bonds (Figure 2). Looking at the long term (since March 2013), the total return of the Hang Seng High Dividend Yield Index has been mainly driven by dividend income (Figure 10), resulting in a risk-adjusted total return (0.44 times) higher than the market's 0.21 times (Figure 11). The Hang Seng High Dividend Yield Index reflects a more substantial long-term risk-adjusted total return by tracking high-quality companies that maintain stable dividend payouts

Component stocks are adjusted in a timely manner to closely follow the ever-changing market environment

The Hang Seng High Dividend Yield Index aims to reflect the overall performance of high dividend securities listed in Hong Kong. In terms of index composition, the Hang Seng High Dividend Yield Index is calculated based on the net dividend yield (i.e., dividend yield after tax deduction) and is weighted by the large and medium-sized stocks of the Hang Seng Composite Index, with a 10% cap on individual stock weight.

In addition to trading volume requirements, component stocks of the Hang Seng High Dividend Yield Index must also have a record of cash dividends for at least three consecutive fiscal years. In terms of volatility, securities ranking in the top 25% of historical annualized volatility over one year will be excluded from the selection to avoid including highly volatile component stocks. Furthermore, securities meeting the following two conditions will also be excluded from the selection: i) stock price has dropped by more than 50% in the past 12 months; and (ii) stock price performance in the past 12 months ranks in the bottom 10% of eligible candidate component stocks. The top 50 securities ranked by net dividend yield will be selected as component stocks of the Hang Seng High Dividend Yield Index. Please note that if the dividend yield of candidate component stocks is abnormally high, Hang Seng Index Company reserves the right to exclude them from the index.

Overall, the index calculation method of the Hang Seng High Dividend Yield Index demonstrates its adaptability to the ever-changing environment, maintaining the characteristics of high dividend yield and low volatility. As of the third quarter of 2024, the top three industries are finance (37% weight), real estate and construction (15% weight), and energy (13% weight) (Figure 8). Compared to the same period last year, the finance industry saw the largest increase, rising by 8.0 percentage points to 37%. In contrast, the energy industry experienced the largest decline, dropping by 5.8 percentage points to 8% The combined weight of the top 10 constituents reached 27.1% (Figure 9).

Hang Seng High Dividend Yield Index: Dividend income contributes most to total return

From March 2013 to October 4, 2024, the Hang Seng High Dividend Yield Index recorded a price return of +8.6% in the long term, while the total return (price return + dividend return) was +132.0% (Figure 10). Calculated on an annualized basis, the price return is +0.7%, the annualized compound dividend return is approximately +7.0%, and the overall annualized total return is +7.7% [= 7.0% + 0.7%]. In other words, the total return of the Hang Seng High Dividend Yield Index during this period comes from dividend reinvestment return plus price appreciation.

Hang Seng High Dividend Yield Index outperforms the market by 3.4 percentage points on an annualized basis

From a long-term perspective, since March 2013 (as of October 4, 2024), the Hang Seng High Dividend Yield Index has achieved a total return of 132.0% (with an annualized total return of +7.7%), outperforming the market (Hang Seng Composite Index annualized total return of +4.4%) by approximately 3.4 percentage points on an annualized basis (Figure 11). The Hang Seng High Dividend Yield Index has a lower annualized volatility of 17.8% compared to 20.9% for the Hang Seng Composite Index; its risk-adjusted total return (annualized total return / annualized volatility) is 0.44 times, higher than the Hang Seng Composite Index's 0.21 times.