Dogs of the Hang Seng Yielding Average 8%
Last year, I introduced the Dogs of the Hang Seng strategy in a video:
This approach significantly outperformed investing directly in the Hang Seng Index (HSI). Over the period from 2007 to 2022, the strategy would have yielded a remarkable 1,061% return, in contrast to the HSI's modest 56% return during the same timeframe.
Naturally, it's essential to exercise caution when considering backtested results, as real-world performance may differ.
Nevertheless, the strategy remains fundamentally robust and is well-suited for those interested in blue-chip dividend stocks. To begin with, the strategy exclusively targets index stocks, typically representing the largest and most prominent companies within the economy. Additionally, it focuses on stocks with higher dividend yields, which implies that these stocks are comparatively more attractively priced.
The methodology involves the following steps:
Rank the constituents by their dividend yield
Buy the top 30% of the stocks at equal amounts
After one year, re-rank the stocks based on their dividend yields and sell those that no longer qualify while replacing them with new selections from the top 30%.
Rebalance all holdings to equal amounts once again
Repeat Steps 1 to 4 each year
Strategy Modification
#1 Changes to the number of stocks
Since the creation of the aforementioned video, the Hang Seng Index has expanded its roster of constituents to 80. Consequently, the top 30% would now encompass approximately 24 stocks. However, if this number appears excessive, one may opt to reduce it to the top 15 stocks, ensuring a satisfactory level of diversification. In this post, we will employ 15 stocks as an example.
#2 Adjust dividend yields to exclude special dividends
A handful of stocks have been disbursing substantial special dividends. It is prudent to exclude these special dividends from our calculations, as they do not exhibit a recurring nature and could substantially distort the rankings.
#3 Apply 10% dividend tax on China-domiciled stocks
Another consideration involves applying a 10% deduction to dividends originating from China-domiciled stocks, as foreign investors are subject to this tax. This rule does not apply if the stocks are Hong Kong-based.
#4 Lot size issue: omitting oversized stocks
Hong Kong-listed stocks come in various lot sizes, posing a challenge for achieving equal position sizing. Some stocks may prove prohibitively expensive even at the minimum lot size, especially for investors with limited capital. One approach to navigate this issue is to exclude excessively large stocks from consideration.
#5 Using FY2022 dividends
We will utilize full-year dividends for our calculations and rankings. Despite the fact that most companies have already disclosed their interim dividends for FY2023, we will disregard this information and continue to rely on FY2022 figures.