In recent years, the market has paid particular attention to dividend investment, and the long-term investment return performance of dividend indices has increasingly gained recognition. Taking the S&P China A-Share Dividend Opportunities Total Return Index tracked by Huabao Fund's S&P Dividend ETF (562060) and Dividend Fund (Class A: 501029; Class C: 005125) as an example, the annualized return from 2010 to the present has recorded 9.83%. Especially since 2021, the performance of the dividend style has significantly outperformed the Wind All A Index by nearly 62.96%, which highlights the charm of high dividend investment portfolios in the somewhat weak A-share market environment in the last three years. So, can investing in high dividend indices still maintain high returns at present? Today, let's discuss this issue.

To answer this question, we first need to understand where the return of dividend indices comes from? Generally, we can decompose the expected return on stock investment into three parts: profit growth rate, dividend yield, and valuation changes. That is:

The profit growth rate, also known as EPS growth, is the return that investors obtain from the growth of corporate profits, reflecting the profitability and reinvestment level of the company. The profit growth rate can be expressed as the profit growth level obtained by the company continuing to invest undistributed profits in business operations, calculated according to the return on equity (ROE), which depends on the company's willingness to reinvest and the investment efficiency of assets.

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The dividend yield is the return that investors obtain from corporate dividends. The dividend yield is equal to the dividend payout ratio divided by the price-to-earnings ratio, which means that the dividend income obtained by investors depends on the company's willingness to pay dividends (the level of the dividend payout ratio) and the company's valuation (the level of the price-to-earnings ratio).

Valuation changes come from market asset pricing and depend on investors' judgments on future asset prices.

Finally, the investment return of the dividend index can be expressed as:

Can this formula explain the investment return of the dividend index? Referring to the compilation plan of the S&P China A-Share Dividend Opportunities Index tracked by the S&P Dividend ETF (562060), we use historical data from 2010 to 2024 for simulation backtesting, semi-annual portfolio adjustment, and each period selects the 100 stocks with the highest dividend yield to build a dividend portfolio. According to formula (5), we calculated the three sources of returns and finally obtained the fitted long-term investment return by adding them up. The fitted long-term return and the actual annualized return are consistent in direction, and the two have a good correlation, indicating that the profit growth rate, dividend yield, and valuation changes can well explain the changes in the dividend index return.

So, which factor mainly affects the investment return of the dividend index? Breaking down the return into three parts, where blue represents the profit growth part, red represents the dividend yield part, and gray represents the valuation part, the profit growth rate and dividend yield constitute the main part of the return rate, while valuation changes dominate the short-term fluctuations in the return rate. Between the dividend yield and profit growth rate, the proportion of the dividend yield has been increasing, with the dividend yield accounting for less than 25% in 2010, but more than 60% in 2024. Since the profit growth rate and dividend yield are related to the fundamentals of the company, we will collectively refer to these two as the fundamental return rate. The trend of the fundamental expected return rate is consistent with the direction of short-term investment returns, and the overall fundamental return rate is stable at 10~14% [1].Why can the expected investment return rate of dividend indices remain stable? When the return on equity (ROE) of high-dividend companies declines in the short term, there is usually a negative correlation between the ROE and dividend payout ratio of dividend assets, which is an important reason for the stable return rate of high-dividend assets. Corporate profitability often exhibits cyclical fluctuations, a feature evident in the net profit growth trend of dividend indices over the past three years. When a company's profitability is impacted at a certain stage, a decline in asset return rate (ROE) leads to a slowdown in profit growth. At this point, it becomes difficult for companies to create higher earnings growth for investors through reinvestment of internal profits. In such cases, listed companies that focus on cash dividend returns often proactively increase the dividend payout ratio to provide investors with stable fundamental returns by "raising the dividend yield." In other words, during periods of slowing profits, companies are more willing to reward investors through cash dividends; during periods of improving profits, they choose to reinvest profits in business expansion to create returns for investors through profit growth.

This strategy of adopting different return methods at different stages of profitability changes reflects the listed companies' balancing act between investor returns and corporate development. By dynamically adjusting dividend policies, high-dividend companies can take care of investor interests while also reserving necessary funds for their long-term development, thus achieving a win-win situation for corporate value and investor returns.

Referring to the S&P Dividend ETF (562060), we conducted an in-depth analysis of the investment return rate of high-dividend companies in the A-share market and reached three key conclusions: First, the long-term return rate of the dividend index is composed of three parts: profit growth rate, dividend yield, and changes in the price-to-earnings ratio, with the first two being the main components and the latter dominating the fluctuations in short-term returns; second, the fundamentals of high-dividend companies determine that their investment return rate has always been maintained at 10-14%, making the dividend index a reliable long-term investment; third, high-dividend companies maintain a long-term stable investment return performance by adjusting dividend policies. For individual investors, it is a significant challenge to deeply understand and apply these details and purchase individual stocks for dividend investment. Dividend fund products on the market provide a good tool for investors to capture high-dividend assets in the A-share market. Huabao Fund's S&P Dividend ETF (562060) and Dividend Fund LOF (Class A: 501029; Class C: 005125) adjust their portfolios twice a year at the end of January and July, with long-term stable returns, making them powerful tools for implementing dividend investment strategies and worthy of investor attention.