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 notably 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, some investors are beginning to consider: What will be the subsequent performance of bank stocks? And will it affect the investment value-for-money of related dividend indices?
After Valuation Recovery, Dividend Indices Still Offer Attractive Yields
Following the sustained rally, the overall valuation level of the banking sector has risen, with its rolling price-to-earnings ratio now 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 increase.
But from a dividend yield perspective, the "real cash" dividend returns remain attractive. Even after a sustained rally, the overall dividend yield of banks is still at 5%, a relatively high level at the 70th percentile of the past decade. Therefore, for long-term investors seeking stable dividend returns, the long-term allocation value of banks is still worth noting.
At the index level, according to Shenwan’s primary industry classification, banking is the largest weighted sector in both the CSI Dividend Low Volatility Index and the CSI Dividend Index, accounting for 51% and 26%, respectively. Currently, both dividend indices offer dividend yields above 5%.
Monitor Trends in Cyclical Sectors and Balance Dividend Asset Allocation
The CSI Dividend Low Volatility Index incorporates a "low volatility" factor on top of high dividends, giving greater weight to sectors with smaller price fluctuations, such as banking and utilities, while reducing the weight of strongly cyclical industries like coal and chemicals.
However, looking back at similar historical trends, we can observe that when the correlation coefficient between the CSI Dividend Index and banking stocks (referred to as the correlation coefficient) climbs to a historically high level of around 0.9, the dividend rally is largely driven by banking stocks. In such cases, a style rotation within dividend assets is likely to occur in the following period, with cyclical dividend assets like coal often performing relatively well.
This suggests that when allocating dividend assets now, in addition to the CSI Dividend Low Volatility Index (which has a high banking weight), investors may consider pairing it with other indices like the CSI Dividend Index or the Hang Seng Stock Connect High Dividend Index, which also feature high dividends but have relatively lower banking weights and higher exposure to resource sectors like coal.
Overall, banking remains attractive to long-term investors focused on dividend income, with dividend indices heavily weighted in banks maintaining yields above 5%. However, investors should be mentally prepared for short-term volatility. For those concerned about the impact of banking sector fluctuations on their investment experience, they may also consider dividend index products with relatively lower banking weights and slightly higher cyclical resource exposure to adapt to potential style shifts and better capture the overall allocation opportunities in dividend assets.
