Recently, the banking sector has continued to strengthen, with many bank stocks hitting record highs one after another. As of the close on July 10, the banking industry has risen nearly 20% this year, ranking first among the 31 Shenwan primary industries. Driven by the banking stock rally, the CSI Dividend Low Volatility Index has performed remarkably well recently, with continuous inflows of funds into related products such as the Dividend Low Volatility ETF (563020). Other dividend indices have also seen significant gains.
However, at the same time, some investors are beginning to consider: What will be the subsequent performance of bank stocks? And will it affect the investment cost-effectiveness of related dividend indices?
After the valuation recovery of banks, the dividend yield of dividend indices remains attractive
After sustained gains, the overall valuation level of the banking industry has risen, with its rolling P/E ratio at the 83rd percentile of the past decade, approaching the highs of 2018 and 2021. In the short term, the rapid rise driven by valuation recovery may slow, and stock price volatility could also increase.
But from the perspective of dividend yield, its "real cash" dividend returns remain attractive. After a sustained rally, the overall dividend yield of banks is still 5%, at a relatively high level of the 70th percentile over the past decade. Therefore, for long-term investors seeking stable dividend returns, its long-term allocation value is still worth noting.
At the index level, according to the Shenwan primary industry classification, banks are the largest weighted sector in both the CSI Dividend Low Volatility Index and the CSI Dividend Index, accounting for 51% and 26%, respectively. Currently, the dividend yields of these two dividend indices are both above 5%.
Monitor the trends of strongly cyclical industries and balance the allocation of dividend assets
The CSI Dividend Low Volatility Index incorporates a "low volatility" factor on top of high dividends, giving greater weight to sectors with smaller stock price fluctuations, such as banks and utilities, while reducing the weight of strongly cyclical industries like coal and chemicals.
However, if we look back at similar historical trends, we can find that when the correlation coefficient (hereinafter referred to as the correlation coefficient) between the CSI Dividend Index and bank stock performance climbs to a historical high of around 0.9, the dividend rally is largely driven by bank stocks. In the following period, a style shift is likely to occur within dividend assets, and strongly cyclical dividend assets like coal often perform quite well.
This suggests that when allocating dividend assets currently, in addition to the CSI Dividend Low Volatility Index with a high bank weighting, investors may consider pairing it with indices like the CSI Dividend Index or the Hang Seng Stock Connect High Dividend Index, which also feature high dividends but have relatively lower bank weightings and higher resource sector weightings like coal.
Overall, banks remain attractive to long-term investors who prioritize dividend income, with dividend indices heavily weighted in banks maintaining dividend yields above 5%. However, investors should be mentally prepared for short-term fluctuations. If concerned about the impact of banking sector volatility on investment experience, they can also pay attention to dividend index products with relatively lower bank weightings and slightly higher cyclical resource content to adapt to potential style shifts and better capture the overall allocation opportunities of dividend assets.
