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Since May, the dividend index has entered an adjustment phase, with a diversified performance.

Since May of this year, the dividend style has changed from a single-sided upward trend in the past.

With the divergence of sector fundamentals and the impact of capital flows, high-dividend stocks in consumer areas such as food and beverages, textiles and apparel, and home appliances have weakened first; starting in July, resource sectors like coal and oil and gas have also undergone significant adjustments under the influence of mid-term report expectations and other factors; some sectors like public utilities, highways, and banks have remained strong, but since late August, these strong dividend sectors have also entered a catch-up decline.

The CSI Dividend Index has been flat with a slight decline since the beginning of the year, with banks and home appliances still having absolute returns.

Under the marginal changes in the macro environment, the differentiation of earnings on the molecular side and the expected changes in the overall valuation cost-effectiveness of the sectors may be the main reasons for the market differentiation.

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Our March report "How to Find Investment Opportunities for Dividend Improvement" indicated that the focus of the subsequent high-dividend strategy needs to shift from the denominator to the numerator.

The difficulty of the overall beta market in the future has increased, and the fundamentals of individual stocks and the certainty of dividends are more important pricing factors.

The recent differentiation in the performance of high-dividend stocks is also more reflected in the marginal changes in the prosperity and performance certainty of the pricing numerator.

Before May, investors generally expected a slightly stable fundamental situation but insufficient improvement elasticity, coupled with the continuous downward trend of risk-free interest rates, the dividend board's fundamental expectations were more stable, thus relatively benefiting, and the rising sectors showed a trend of expansion in the first and second quarters of this year; however, since May, with the marginal weakening of domestic demand expectations, the downward trend of M1 year-on-year, and the revision of performance expectations for consumer and other domestic demand-related sectors accompanied by stock price adjustments, the expectation of a cooling US economy has increased, coupled with tariffs and energy supply concerns, the adjustment of sectors dominated by external demand resources and export logic has been significant, and sectors with weak economic cycle attributes, relatively stable cash flow, and performance have been more resistant to falls.

Finance, on the one hand, has an expected difference in asset quality, and on the other hand, it benefits relatively from the capital side, becoming one of the few dividend sectors with strong performance.

Although the banking sector has adjusted after the end of August, it has still led the A-share market since the beginning of the year.

The classification of dividend sectors is of great significance to the current differentiated market: 1) Natural Monopoly Dividends: Industries have relatively stable cash flows and are less related to the economic cycle.

In addition to public utilities such as electricity, we also classify ports, railways, highways, publishing, telecommunications services, and gas as such.

The market requires a lower risk compensation for these industries, and the dividend rate requirement is also relatively low.

2) Resource Dividends: They have a strong cyclical attribute, and their profits and cash flows are greatly affected by price factors.

In recent years, they have benefited from the supply logic and achieved a synchronous increase in cash flow and dividends, such as coal and petrochemicals.

However, the cyclical performance requires the market to demand a certain risk premium compensation, and the dividend rate requirement is relatively high.

3) Pan-Consumer Dividends: The industry's fundamentals are highly related to domestic demand or exports, and they are highly correlated with the domestic and foreign economic cycles, such as food and beverages, textiles and apparel, home appliances, machinery equipment, etc.

However, most listed companies are leading companies in the mature stage, which do not require much capital expenditure, and the industry pattern is stable and may achieve revenue breakthroughs through exports and overseas expansion, not solely based on dividend rate pricing.

4) Financial Dividends: The industry's general characteristics are stable performance, but the market has different perceptions of asset quality, such as banks and insurance companies, with lower valuations and relatively high dividend rate levels.

Combining the above classification, we select representative companies to construct sector analysis, and the four major dividend sectors show high differences in fundamentals, dividends, and dividend rate characteristics.

► Fundamental Characteristics: Weak cyclical industries have strong stability, and some pro-cyclical or industries with better prosperity have more elasticity.

The fundamentals of natural monopoly dividends are relatively less related to domestic and foreign economic cycles, and although the performance lacks growth, it is relatively stable, with relatively stable cash flow.

The ROE has been basically maintained at around 10% in the past five years with low volatility; in terms of resource dividends, the price of oil and gas is highly related to the overseas demand cycle, and the coal price is mainly influenced by domestic demand but also related to overseas energy prices.

The energy sector has a low long-term capital expenditure, and the supply-tightening logic is currently receiving attention in the economic environment.

The ROE center has also increased and remained high in recent years, currently around 11%, but since this year, affected by the phased weakening of domestic and foreign demand, the profit expectation has decreased.

Most of the pan-consumer dividend industries are mature industries with better competitive patterns and leading companies, not only with good cash flow but also with expectations of overseas expansion.

The profitability and performance growth rate are relatively good, and the leading ROE is still around 16%, but recently, with the phased weakening of macro fundamentals, the profit expectation has also been adjusted; in terms of financial dividends, bank profits are relatively stable, but investors also have some differences in expectations of asset quality.

The performance of insurance is more volatile than banks.

In recent years, the financial ROE center has declined a lot in the long cycle, currently around 9%.

► Dividend Characteristics: The business model and industrial life cycle affect the dividend model.

Due to the high certainty of cash flow but the lack of growth in natural monopoly dividend industries, some enterprises' dividend amounts basically remain stable, and some high-quality leading companies can even increase the dividend amount every year.

The dividend rate in the pan-consumer dividend industry is usually high, and leading companies with a stable industry competitive pattern and entering the stable period of the industrial life cycle usually choose a high dividend ratio.

Many companies adopt a stable dividend ratio model, and dividends basically increase with the growth of performance.

In recent years, some leading consumer goods and home appliance companies have maintained a dividend ratio of around 60-70%, but if profits are affected by macro factors and fluctuate, dividend behavior may also be affected.

The dividend of the financial dividend sector mostly adopts a stable dividend ratio, and the dividend amount is also relatively stable in the low performance growth environment.

► Dividend Rate Characteristics: A stable operation and dividend model help to reduce the risk compensation of the dividend rate.

The dividend rate is the main consideration for dividend companies.

The price-earnings ratio reflects the expectations and certainty of profit growth, and the dividend rate is also affected by the dividend trend and certainty.

Different performance characteristics and dividend models will bring differentiated dividend rate centers.

Generally speaking, the market requires a lower dividend rate risk compensation for stable industries, and the dividend rate center is usually based on risk-free income and gives a little risk premium.

The faster the dividend amount increases, the lower the dividend rate requirement; cyclical industries usually require a higher dividend rate level.

The market pricing requires a higher risk compensation for dividend uncertainty.

In our previously published "How to Find Investment Opportunities for Dividend Improvement," we analyzed the dividend model of resource leaders in the US stock market, adopting a peak-cutting and valley-filling dividend model to ensure that the per-share dividend achieves positive growth every year, and the dividend rate is also only at the level of 3-4%.

This again shows the importance of stable dividend expectations for dividend stocks.

Specifically, the natural monopoly dividend industry has a high dividend certainty, and the market requires a lower risk compensation for its dividend rate.

Its dividend rate is the closest to the yield of 10-year government bonds.

The resource dividend industry has high dividend uncertainty and often requires a higher dividend rate risk compensation, but in recent years, the supply logic has increased the certainty of profits, and the dividend rate risk compensation has decreased.

The dividend rate of some leading companies has once dropped to the level of 4-5%.

The pan-consumer dividend industry's fundamentals are affected by the economic cycle.

Since this year, the phased decline in expectations for fundamentals has led to increased dividend uncertainty, and the dividend rate risk compensation has increased, and the dividend rate of some leading companies has also reached above 5%.

Due to asset quality reasons, the financial dividend usually requires a higher dividend rate risk compensation, but this year there is an expected difference in both asset quality and the capital side.

From different industries, as of September 21, coal (leading companies around 6.0%), banks (leading companies around 5.5%), petrochemicals (leading companies around 4.7%), textiles and apparel (leading companies around 4.2%), home appliances (leading companies around 3.9%), are at the forefront of dividend rates.

Looking at the representative companies of the four major dividend sectors, the dividend rates of natural monopoly, resource, and financial dividend sectors have all experienced a process from rising to falling in recent years.

Before 2023, the dividend rate increased with the continuous increase in the dividend scale, but in the high dividend upward trend in the past two years, it has gradually fallen; the dividend rate of the leading stocks in the pan-consumer dividend sector is differentiated, and the dividend rate of some companies has continued to rise in the environment of weak stock prices.

The long-term logic of dividend style dominance has not changed, but it is necessary to pay attention to the current valuation changes and the continuation of differentiation.

Currently, China's economy is in the second half of the financial cycle.

Under the joint action of long-term structural inflection points such as population, real estate, deglobalization, and residents' balance sheets, the problem of insufficient demand is relatively prominent.

The imbalance of supply and demand brings a low-price environment, and the interest rate center is low.

Listed companies' capital expenditure has fallen, growth opportunities are relatively scarce, and companies with relatively good cash flow are more inclined to dividends, ensuring the numerator of dividend stocks.

On the capital side, in the environment of stock game, funds prefer relatively certain returns.

Since the beginning of the year, incremental funds such as insurance funds and index ETFs have been more favorable for dividend stocks.

The above trends are still continuing, and dividend assets are expected to have relative returns in the medium term.

However, considering that the dividend style has had more relative returns in the past three years, the dividend rate of some traditional dividend companies is less than 1% of the risk compensation of the 10-year government bond yield; the background of stock game may intensify the motivation of funds to take profits and "cut high to low"; the current phased expectation of the fundamentals is weak, which also brings changes to the performance and dividend expectations of different types of dividend stocks.

In this context, we believe that the internal differentiation of the dividend sector may continue in the short term, and the certainty of the numerator is still a more critical factor for excess returns.

How to judge the rotation of the four types of dividend sectors?

We believe that the core depends on the changes in macroeconomic fundamentals expectations, and it is also necessary to pay attention to factors such as the capital side and valuation cost-effectiveness.

Among the four types of dividend assets, natural monopoly dividends have relatively counter-cyclical attributes, and the other three have certain pro-cyclical attributes.

If the short-term growth expectation changes are small, and the market's expectations for the fundamentals of listed companies and price inflation are still to be improved, in this environment, the stability of the numerator of natural monopoly dividend assets is better than other sectors; if subsequent stable growth policies are further intensified, the pan-consumer dividends and resource dividends that have been adjusted before and have high valuation attractiveness may have stock price elasticity.

In these two types of sectors, the oil and gas, export chain, and other external demand-related fields will also be affected by overseas factors.

In addition, the changes in the crowding degree of funds in different sectors, and whether the safety margin of dividend rate valuation is sufficient, are also key factors to consider in allocation and stock selection.When is the dividend strategy at risk of underperforming?

We believe it is crucial to focus on potential changes from an environment characterized by "scarcity of growth and declining interest rates."

On one hand, attention must be paid to the implementation and response of subsequent policies aimed at stable growth, especially if there are unexpected changes in fiscal and real estate policies, which could alter investors' shifts in investment styles.

On the other hand, if the growth sector regains market attention due to improved economic conditions or technological advancements, it could also have a certain impact on the dividend style in an environment of stock market competition.

In our report, we have updated the recommended A-share dividend companies for investors' reference.

Note: Growth industries include semiconductors, components, consumer electronics, pharmaceutical chemicals, biologics, medical devices, medical services, photovoltaic equipment, batteries, automation equipment, aviation equipment, military electronics, computer equipment, IT services, software development, gaming, communication equipment, liquor, and small appliances, among other SWS second-level industries.