BlackRock, Vanguard funds see China’s most generous dividend payers as the juiciest stock picks amid muddled market outlook

Shanghai Stock Exchange Dividend Index has outpaced the market by three to one in generating returns for investors
Wuxi Commercial Mansion, Yanzhou Coal, among the biggest index members, have rallied by 48 to 82 per cent this year

China stock market

Zhang Shidongin Shanghai

Published: 7:30am, 15 Jun 2021

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China’s stock market, muddled by slowing growth and policy tightening risks, has turned the nation’s top dividend-paying companies into a safe harbour for funds managed by the likes of BlackRock and Vanguard.

The Shanghai Stock Exchange Dividend Index, which tracks 50 of its top-paying companies, has handed investors 12.6 per cent return this year versus the benchmark index’s 3.8 per cent. That makes it among the best fund strategies for onshore stocks so far this year.

The winning run underscores prevailing caution on the world’s second largest market as the days of easy money end and stock picking in a rangebound pattern becomes hazardous. Major onshore investment banks are divided on the second half outlook amid concerns about earnings slowdown, dwindling liquidity and faster inflation.

“We recommend allocations into high-dividend stocks on the lack of capital flows and risk appetite in the short term,” said Tang Jun, an analyst at Zhongtai Securities. “There will be no clear-cut opportunity in the market for now while trading will be light.”

Since a 6.4 per cent surge in the opening seven weeks of 2021, the Shanghai Composite Index has slipped and swung within a 250-point range. Hamstrung by tightening regulatory scrutiny and multi-year high inflation at factory gates, foreign investors have kept their powder keg dry while waiting for new catalysts.

BlackRock, the world’s biggest money manager with US$9 trillion of assets, and its US peers like Vanguard and Invesco, are among the shareholders of the biggest constituents in the Dividend Index.

Shares of Wuxi Commercial Mansion Grand Orient, the biggest with a 5.9 per cent weight, have surged 82 per cent this year. Vanguard held almost 850,000 shares as of April in the retailing to car-distribution group based in eastern Jiangsu province.

Yanzhou Coal Mining, the second largest member, has advanced 48 per cent this year. It counted BlackRock, Invesco and UBS funds among its owners as of April statistics.

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“Against the backdrop of policy tightening expectations, there’s a big chance that trading will continue to concentrate on stocks with stable outlooks and high dividends,” said Qu Yiping, an analyst at Shengang Securities.

Not everyone agrees with the strategy of buying into companies with generous dividend payout as a long-term play.

The risk-on mode will probably return in the second half, as slower inflation and stable monetary policies will burnish the market’s appeal once again, according to brokerage Shenwan Hongyuan Group. Some investors see the current doldrums as an opportunity to pick up popular bets again.

While the market breather has depressed short-term performance, it has given JPMorgan Asset Management a chance to buy its favourite stocks on the cheap. Its money managers are going for technology hardware, pharmaceutical leaders and electric-vehicle suppliers to outperform the market.

Over the long run, the Dividend Index has underperformed companies that are most representative of the Chinese economy. The Dividend Index delivered an annual return of 2.7 per cent over the past decade, almost half the yield of CSI 300 Index members, according to Bloomberg data.

For now, however, locking up dividend-rich companies has historically panned out well in a sideways-trading market, according to Founder Securities. They produced above-average returns within at least a year in the aftermath of the 2015 market crash and the rout in 2018, when the trade war and the deleveraging campaign crushed equities, it added.

China’s push for better corporate governance is also one reason dividend stocks are thriving. Over the past decade, the number of mainland-traded companies with records of paying cash dividends has more than doubled to 2,691, making up 65 per cent of the total listings, according to Huaxi Securities.

“Dividend-rich stocks have a high safety margin,” said Li Lifeng, a strategist at Huaxi Securities. “When the market progresses to a stage where earnings will be the key focus, investors can enjoy not only increasing returns from dividend payouts but also additional upside from valuation expansion.”

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