In the ever-evolving landscape of finance and investment, high-yield stocks have emerged as a focal point for investors, particularly in uncertain economic climatesThe recent drop of nearly 10% in high-yield dividend stocks has sparked fervent discussions among market participantsIs this correction indicative of a downward trend or merely a temporary retreat? More importantly, does this present an opportunity to invest?

This theme is not new; every time high-yield equities experience a periodic pullback, debates arise concerning their future viabilityHistorically, as has been noted, these stocks tend to thrive during times when they are embraced by widespread market consensusIn fact, their returns have consistently outpaced many other asset classes in China, leading to a substantial interest from investors seeking stable income sources.

Take, for instance, the recent inclusion of the Ping An Hong Kong High Dividend ETF (03070.HK) in the Hong Kong Stock Connect program

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By the end of July, it had recorded a striking 25% increase in value since the beginning of the year, demonstrating resilience as it only pulled back around 7% during the recent market volatilityWhen compared to technology stocks, which have seen corrections of 10% to 15%, the drop experienced by high-yield stocks appears relatively modest.

Critically analyzing the performance solely based on short-term price adjustments may lead to superficial conclusions about the fate of these high-yield stocksThe underlying economic conditions continue to favor these investments, especially as overall asset yields declineHigh-yield stocks, particularly those with strong cash flows, remain appealing for sustained investment, revealing a compelling narrative for long-term holders.

Of course, selecting the right high-yield stocks can be challengingIt's not enough for a stock to simply boast a high dividend yield; investors must also consider a company's financial health, consistent profitability, and ability to maintain future dividends

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This multifaceted assessment is essential for successful investment in high-yield stocks.

To understand the recent fluctuations in high-yield stocks, one must first analyze the broader market environmentFor instance, China National Offshore Oil Corporation (CNOOC) saw its stock price plummet by almost 15% recently—one of the most significant declines among high-yield sharesThe core issue here is not a fundamental change in CNOOC's operations, but rather broader macroeconomic factors and trading sentiment affecting resource stocks universally.

Over the past few weeks, global macroeconomic changes have exerted reciprocal influence on high-yield stocksAfter an astronomical rise of nearly 80% earlier this year, CNOOC's substantial pullback can also be attributed to profit-taking activities among investors seeking to capitalize on its rapid ascent.

From an earnings perspective, it is unrealistic to anticipate a drastic scale-up in oil production, especially against the backdrop of deteriorating relations between oil-producing nations and the United States

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While market speculation might lead to short-term fluctuations in oil prices, the logic of increased production has not yet come to fruition.

From a trading standpoint, the current market does not offer many stable return optionsIn such an environment, some investors have turned to high-yield stocks as a safe haven, drawn by the growing disparity between dividend yields and risk-free ratesFollowing a significant rally, it is natural for some of these investors to exit their positions, leading to the observed market retreatHowever, the foundational “dividend” factor that underpins high-yield stock investing remains unchanged.

In simplified terms, the upward trajectory of high-yield stocks is predicated on three core premises: the expectation of long-term growth is on the decline, risk-free rates are trending downward, and the ongoing asset scarcity period is resulting in increased corporate dividend payouts, further widening the gap between dividend yields and risk-free bond yields.

Examining recent economic conditions within China reveals continued support for the logic underlying high-yield stocks

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For instance, June data on consumer spending showcased sluggish growth, with GDP growth in the second quarter dropping to 4.5%, down from 5.5% in the first quarterConcurrently, on July 22, the People's Bank of China announced a decrease in the one-year and five-year Loan Prime Rate (LPR) by 10 basis points.

Amidst this backdrop of economic weakness combined with dropping interest rates, the 10-year government bond yield reached new lows, hitting a minimum of 2.13%. Additionally, rates on guaranteed whole life insurance products also fell below 3%, now at 2.5%, while bank deposit rates sank into the “1% era.” With asset scarcity continuing to intensify, options for securing a return above 3% have dwindled significantly.

In stark contrast, several recently adjusted high-yield stocks, such as CNOOC, China Mobile, and PetroChina, still offer dividend yields exceeding 6%, far surpassing those found in government bonds and insurance products

Moreover, high-yield stocks offer superior liquidity compared to bonds or insurance products, coupled with the potential for valuation appreciation.

From a competitive standpoint, the structural advantages enjoyed by monopolistic state-owned enterprises ensure their ability to sustain dividend payments is largely unfettered by market forcesSo, how should an investor evaluate the ongoing viability of high-yield stocks?

Drawing from the experiences in Japan post-1990s, where foreign investors capitalized on high-yield stocks, we can derive valuable insights: as long as the yield of a high-yield stock exceeds that of risk-free government bonds, it continues to possess investment merit due to its stable dividend returnsAdditionally, firms that consistently enhance their dividends may see their stock prices appreciate, even if bond yields stabilize.

Given the importance of margin for safety, it is suggested that any high-yield stock with a dividend yield of over 5% is worth considering for further investment

The recent pullback in high-yield stocks presents an opportune moment for re-entry.

It is also noteworthy that many of the Hong Kong-listed “Big Three” oil companies and telecommunications operators boast dividend yields exceeding 6%. Furthermore, major state-owned banks such as Bank of China, Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and China Communications Bank exhibit yields in the region of 7%.

For investors confronted with a meager 2.1% return on ten-year treasury bonds, choosing state-owned bank stocks that provide both safety and high returns seems an obvious choice.

Looking ahead, the allocation of central state-owned enterprises has increased from 15.4% to 17.2% on average, with significant positions in telecommunications, construction, oil, and coal sectorsThe rising interest in high-yield stocks is reflected in the index composition, where positions based on the China Securities Index have climbed from 5.1% to 5.6%. However, it is important to note that the allocations still appear low.

The capital flowing into high-yield stocks is not confined to retail investments but includes substantial influxes from institutional investors, particularly insurance firms, who see these stocks as a hedge against future rate cuts.

Notably, insurance institutions tend to favor high-yield stocks listed on the Hong Kong exchange

When comparing A-shares and H-shares of the same companies, H-shares generally offer higher dividend yields due to pricing discrepancies, making them more appealing even after accounting for dividend taxes.

For example, the Bank of China H-shares provide a yield of 7.5% compared to 5% for A-shares, while CNOOC yields 6% in H-shares versus 3.9% in A-shares, and China Mobile offers a yield of 6.6% in H-shares against 4.2% in A-shares.

Investment in high-yield Hong Kong stocks, however, presents challenges in stock selection, leading many investors to consider ETFs as a practical means to achieve diversified exposure.

Take the Ping An Hong Kong High Dividend ETF (03070.HK), which was recently included in the Stock Connect program—it has achieved a remarkable 25% return since the start of the yearIn comparison, similar ETFs such as the ICBC Hong Kong High Dividend Select have recorded a mere 9%, while the Bosera Hang Seng High Dividend ETF posted a modest 7%. Moreover, the S&P Hong Kong Low Volatility Dividend Index has delivered a 9% return this year.

Why is there such a disparity in performance? For instance, the Bosera Hang Seng High Dividend ETF experienced an 11% pullback since the end of May

However, the Ping An ETF only saw a 3% declineThe former's substantial portfolio is quite diversified, with no concentration in stocks that command market favor.

However, a high dividend yield does not inherently signify investment value; it is essential to focus on profitability and dividend sustainabilityWhen portfolio concentration is low, the negative effects of poorly performing stocks are magnified during market downturns.

On the contrary, the Ping An Hong Kong High Dividend ETF emphasizes concentrated holdings, directing 75% of its investments in robust companies like the leading state-owned oil companies and telecom operatorsJust as a few tech giants play pivotal roles in driving growth in the U.Sstock market, a strategic concentration on similar pillars is imperative for any investment thesis.

By July 26, the Ping An Hong Kong High Dividend ETF maintained a 25% return, with a past year payout ratio of 6.94% providing investors with returns surpassing 30%, clearly outperforming the average return of about 15% for comparable high-yield equity ETFs.

In conclusion, against the backdrop of growing asset scarcity, financial markets may face further monetary easing in the coming year, with expectations for declining domestic interest rates