To get in on the hottest equity trade in China right now, you'll have to be quick.
Dividends are emerging as a key lure for investors in the world's second-largest share market, with stocks of companies that consistently hand out the most cash outperforming the Shanghai composite index by the most since 2013. The catch? These plays are few and far between with China renowned as one of the stingiest markets globally when it comes to shareholder payouts.
"What we're finding fascinating is the whole yield story in China – you'd never think investors would look at China" for dividends, Catherine Yeung, an investment director at Fidelity International, which manages about $290-billion (U.S.), said in an interview. "This trend is likely to continue and it's going to bode well for these companies from a foreign investment perspective."
Despite this historical reluctance to embrace dividends, China has emerged as one of the best dividend trades this year, with Chinese payout stocks outperforming the market more than those in the United States and Europe, where yield has been popular since the global financial crisis. The Shanghai dividend index climbed 1.1 per cent on Wednesday, swelling its advance this year to 8 per cent.
Investors have long pushed for better yields from Chinese equity markets, which are dominated by state-run companies not necessarily attuned to the demands of international shareholders. More than a quarter of companies in the Shanghai composite didn't announce a dividend in their most recent results, while those that do pay shell out an average 35 per cent of their profits to shareholders, compared with 79 per cent for European companies and 57 per cent globally, data compiled by Bloomberg show.
What's changed is the government's attitude. Beijing is urging state-owned enterprises to focus on dividends as part of a wider restructuring of SOEs. The securities regulator will "talk to" listed companies that don't pay dividends but are capable of doing so, spokesman Deng Ge said March 31. "Tough measures" may be employed against them, he said.
The pressure seems to be paying off.
State-run China Shenhua Energy Co., the country's biggest coal miner, caused a stir last month when it issued a special dividend, spurring a 10-per-cent surge in its mainland-traded shares and fuelling speculation over which companies could be next.
For fund manager Lilian Leung, yield is unseating the economy as a reason to buy into Chinese stocks.
"Many of these companies just started paying dividends," said Ms. Leung, who manages JPMorgan Asset Management's China Income Fund from Hong Kong. "As the economy slows, there's a greater understanding that these strategies work in Asia too, and that China isn't just about growth."
Jefferies Group LLC is doubtful the market will see more dividend manoeuvres like Shenhua's, and other investors have suggested the special payout was more about its parent company's need for cash following a downturn in the coal industry.
The danger when it comes to the Chinese dividend play is that it could attract income-starved investors looking for bond proxies. They could then dump the shares when yields rise, said Robert Davis, who manages NN Investment Partners BV's emerging-market dividend fund in Brussels.
While policy tightening poses a threat to dividend trades, China has cheap valuations on its side, according to Mr. Davis. The Shanghai dividend gauge, which is composed largely of banks, utilities and industrial companies, trades at 9.7 times estimated earnings, 26 per cent below the benchmark's valuation, data compiled by Bloomberg show.