In the current low-interest-rate market environment, dividend indices have become a popular choice for asset portfolio allocation due to their high dividend yields and consistent payout capabilities. Statistics show that there are currently about 38 dividend indices tracked by passive fund products in the market, with a total of 269 products following these indices.
Faced with so many indices, are you feeling overwhelmed and unsure which one to pick? Don’t worry. This article outlines four steps to help you select the dividend index that best suits your needs.
Step 1: Clarify Categories and Identify Differences
Although there are many dividend indices, categorizing them based on their stock selection criteria can help clarify the differences between types.
First, they can be divided into A-share dividend indices and Hong Kong dividend indices based on the scope of constituent stocks. In recent years, Hong Kong dividend indices have generally exhibited higher volatility and dividend yields compared to A-share indices.
Second, whether A-share or Hong Kong dividend indices, they can be further divided into three categories based on screening criteria: single-factor strategy dividend indices, multi-factor strategy dividend indices, and industry/thematic dividend indices.
Simply put, single-factor strategy dividend indices focus solely on dividend yield when selecting constituents, making their criteria relatively pure. For example, the CSI Dividend Index selects the top 100 securities with the highest average cash dividend yield over the past three years from the sample universe.
Multi-factor strategy dividend indices consider additional factors such as low volatility and quality alongside dividend yield. This multi-factor screening mechanism results in different risk-return characteristics. For instance, the CSI Dividend Low Volatility Index selects 50 securities with the lowest volatility over the past year from high-dividend-yield securities, enhancing the index’s risk resistance through a dual screening mechanism.
Industry/thematic dividend indices, in addition to dividend yield, restrict selection to specific industries or themes. For example, the CSI State-Owned Enterprise Dividend Index selects 100 listed securities from state-owned enterprises with high cash dividend yields, stable payouts, and sufficient scale and liquidity.
Step 2: Examine Dividend Yield
Historical analysis and logic suggest that medium- to long-term investments in high-dividend-yield companies can lead to better performance. Investing in high-dividend-yield companies is a hallmark of dividend strategies, making dividend yield one of the most critical metrics for dividend index investing.
For example, comparing A-share and Hong Kong dividend indices, the average dividend yield of Hong Kong indices is currently 7.45%, higher than the 5.01% average for A-share indices. This is mainly due to Hong Kong dividend assets offering higher cash payout ratios and lower valuations compared to A-shares.
Step 3: Analyze Sector Allocation
We selected the six most-tracked indices in each category to observe sector allocations.
Most dividend indices allocate the highest weight to the banking sector, followed by transportation, coal, and other industries.
Investors who prioritize sector diversification (which significantly impacts index volatility) can choose indices based on their sector weight distributions. For instance, if concerned about overexposure to a single sector (e.g., banking), investors may opt for a dividend strategy with lower concentration in that sector.
Additionally, from the perspective of index concentration and sector distribution, indices with more concentrated sector allocations tend to exhibit higher elasticity and stronger offensive potential in certain market phases. However, actual performance may not always align with this logic, necessitating further analysis of return and volatility—which brings us to Step 4.
Step 4: Evaluate Risk-Return Characteristics
The earlier discussion focused on price indices, but when assessing dividend index returns, it’s recommended to use total return indices, which include reinvested dividends, providing a more comprehensive reflection of the strategy’s value.
Dividend strategies incorporating other factors or themes (e.g., low volatility or state-owned enterprise focus) not only achieve higher returns but also exhibit better control over volatility and maximum drawdowns compared to single-factor strategies. For example, the Dividend Low Volatility 100 Total Return Index delivered an annualized return of 10.26% over the past five years, with volatility of 15.43% and a maximum drawdown of -13.6%, outperforming the CSI Dividend Total Return Index (9.34%, 16.75%, and -18.39%, respectively).
Moreover, while Hong Kong dividend indices historically offer higher returns than A-share indices, they also come with higher volatility and larger maximum drawdowns.
In summary, when selecting a dividend index, follow the four steps above to find one that aligns with your investment philosophy and risk tolerance. Then, allocate to the corresponding index fund to ensure the dividend strategy complements your investment approach.
