China Dividend Stocks Shine

Reuters reported that in the first week of 2024, China's dividend-themed exchange-traded funds (ETFs) attracted over 2 billion yuan ($279.10 million) in net inflows. In contrast, while the CSI Dividend Index rose by 2.6%, the CSI Index fell by 3% during the same period.

Chinese investors, seeking higher yields, may find the stock market increasingly attractive in an environment of rate cuts. This is evident as the yield on China's 10-year bonds stands at 2.5%, while the CSI Dividend Index offers an average dividend yield of 6.3%.

Furthermore, with China's tech stocks experiencing significant downturns, investors are likely becoming more risk-averse, favoring stocks that provide tangible returns through dividends. This strategy may shift their focus away from immediate share price fluctuations, allowing for greater patience as they wait for stock recovery and the potential for substantial capital gains.

We identified three ETFs that track the CSI Dividend Index:

These ETFs are not extensively covered by the English-speaking world, and one would have to explore Chinese websites, such as Sina Finance, to find more information about them.

We can get a glimpse of the top 10 holdings in the E Fund CSI Dividend ETF, which includes:

The top holdings of the E Fund CSI Dividend ETF are primarily in the industrial sector, including oil and gas, coal, steel, transport, and port industries. This aligns with China's status as the 'factory of the world,' where rapid industrialization and growth have significantly expanded these companies. Although they may lack the allure of tech stocks, these businesses are consistently profitable and known for distributing generous dividends.

In addition to the dividend ETFs listed in mainland China, there are alternative options available in Hong Kong. We have highlighted two such ETFs in an article Growth Dragons.

Another relevant ETF is the Ping An of China CSI HK Dividend ETF (SEHK:3070), which, unlike the CSI Dividend Index ETFs, tracks a subset of the index limited to H-Shares, or those companies listed in Hong Kong.

The CSI HK Dividend Index shares some common holdings with the broader CSI Dividend Index:

Indeed, investing in a dividend-focused ETF like the Ping An of China CSI HK Dividend ETF (SEHK:3070) appears to have been more advantageous than opting for the Hang Seng China Enterprises Index ETF (SEHK:2828). Over the past three years, the former has delivered positive gains, after factoring in dividends, in contrast to the latter's three consecutive years of losses.

Lastly, it's important for foreign investors to note that a 10% dividend tax applies to their investments. Therefore, when calculating the actual yield from stocks or ETFs, this tax should be taken into account and deducted from the distributed dividends.

The recovery timeline for Chinese stocks remains uncertain, largely dependent on when foreign investors will return to the Chinese market. In the meantime, one viable strategy to capitalize on the current low valuations of Chinese stocks is to invest in those with high and sustainable yields. This approach allows investors to secure regular payouts while they wait for potential capital gains.