CITIC Securities: How to understand the differentiation of this round of high dividend strategy?

Guotou Securities released a research report stating that as of early May 2024, various dividend index performances showed a synchronous upward trend, with differentiation starting in mid-May. The SZ Dividend Index, with a higher proportion of consumption and textiles & apparel, was the first to decline; after early July, the coal industry's prosperity began to decline significantly, and the CSI Dividend Index experienced a sharp drop. In the past few years, the core feature of the high dividend strategy was diffusion. The next core feature of the high dividend strategy will be differentiation, essentially transitioning to a stage where dividends are the core focus after the ten-year government bond yield stabilizes without further decline. In April 2024, Guotou Securities observed that the leading nature of the high dividend strategy was not simply based on optimism for high dividends' pricing (in fact, the best way to reduce risk preference is to reduce positions), but rather on a "value-based" perspective on capital, proposing that "where there is a trend, there is a group embrace." After May 2024, Guotou Securities predicted that the high dividend strategy represented by the CSI Dividend Total Return Index might change from the sharp rise in January through April, and the short-term trading nature of the CSI Dividend Index would be significantly strengthened. Behind the enhanced nature of the high dividend strategy lies a group of securities unable to sustain consistent dividend payments being exposed, and the value-based embrace will drive core high dividend securities into a speculative phase. The so-called core high dividend securities are those based on stable cash flows and an upward trend in ROE that still attract attention for dividends (i.e., utilities: water & electricity + telecommunications services + expressways). Furthermore, utilities are seen as the ultimate winners of the high dividend strategy, driven by the compromise of active long positions. As of early May 2024, various dividend indices showed a synchronous upward trend, with differentiation starting in mid-May, as the SZ Dividend Index, with a higher proportion of consumption and textiles & apparel, was the first to decline. After early July, the coal industry's prosperity began to decline significantly, leading to a sharp drop in the CSI Dividend Index. In terms of the rise and fall of major dividend indices from 2024 to date, the internal ranking is as follows: Dividend Value (+10.03%) > CSI Dividend (+8.29%) > SSE 300 Dividend (+5.47%) > Dividend Low Volatility (+3.13%) > Wind Dividend (+2.48%) > SOE Dividend (+2.29%) > SSE Dividend (+0.11%) > CSI Dividend (-1.84%) > SZ Dividend (-4.82%). In the mid-term report for 2024Q2, Guotou Securities found that the fundamental conditions of the CSI Dividend Index began to decline, weakening both profitability growth rates and future dividend potential, with particular attention to the deterioration of the overall cash holding ratio. Among the major dividend indices, those with relatively lower profitability, significantly declining profitability growth rates, and worsening cash flow status (such as the SZ Dividend and Dividend 100) are relatively underperforming, while those achieving excess returns focus on stronger profit certainty and more robust cash flow directions (such as Dividend Value, CSI Dividend, and SOE Dividend). By further observing the most important fundamental indicator - cash flow, it is found that most index components showing better performance exhibit a trend of rising operational cash flow, declining investment cash flow, and declining financing cash flow, often correlating with stable or improving competitive landscape within the industry, leading companies to increase their cash holdings in stable cash flow business models, ultimately enhancing dividend capacity and shareholder returns. The most noteworthy index in this regard is the Dividend Value Index. In fact, the core feature of high dividend strategies in the past few years was diffusion, while the core feature of high dividend strategies moving forward will be differentiation, essentially transitioning to a dividend-focused stage after the stabilization of the ten-year government bond yield without further decline. From the perspective of fundamental pricing, the observation of high dividend strategies reveals the following conclusions: when the valuation anchor for high dividend pricing is the ten-year government bond yield, the core driving force for sector valuation uptrend lies in the downward movement of long-term interest rates, with the core feature of high dividend investments being "expansion", demonstrating systematic beta-style opportunities for high dividend investments, with the core indicator being dividend yield - ten-year government bond yield; when the ten-year government bond yield stabilizes without further decline, the core feature shifts to "differentiation", seeking securities with continuously improving dividend capabilities, as only securities that can maintain and increase dividends have investment value. In this process, it should be further clarified that core high dividend securities are those based on securities with stable cash flows and ROE trends potential for an upward trend to ensure stable and sustained dividends.