This paper examines the potential benefits of blending high dividend and low volatility strategies in the China A-share large-cap equity market.
- Excluding high volatility stocks from a high-dividend-yield portfolio may reduce portfolio volatility and improve portfolio returns on a risk-adjusted basis.
- The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index overlays a low volatility screen on high dividend stocks. For the period from Jan. 31, 2009, to June 28, 2019, the index delivered pronounced excess returns on an absolute and risk-adjusted basis.
- This index delivered a stable source of income from dividends and showed defensive qualities, with reduced drawdown during down markets.
- The active exposure to dividend yield, low volatility, and value factors contributed most to the active returns, while the sector allocation bias accounted for most of the active risk for the index.
Dividend investment is a popular investment strategy among incomeseeking market participants. Since they were first launched in 2003, dividend ETFs with diverse designs have proliferated across regions of varied characteristics.
In September 2012, S&P Dow Jones Indices launched the S&P 500® Low Volatility High Dividend Index. It uses a unique, rule-based dividend strategy that is designed to combine high dividend yield and low return volatility in a single index. Compared with pure dividend-yield-based strategies, this index has been shown to provide enhanced risk-adjusted performance and incremental defensiveness, which can be particularly attractive to conservative investors.
In the following sections, we examine the effectiveness of a low volatility high dividend yield strategy in the China A-share large-cap equity market, based on companies in the S&P China A Domestic LargeCap Index. We also demonstrate indexing implementation of this strategy using the S&P China A-Share LargeCap Low Volatility High Dividend 50 Index.