Industrial Securities has released a research report indicating that the dividend sector experienced a valuation rebound in July and August, and the market may be gradually entering a phase of rebalancing. For stock selection, the firm recommends constructing a dividend stock pool based on three key dimensions: dividend sustainability, earnings cash flow quality, and valuation attractiveness. First, dividend sustainability requires consistent payout history, with current per-share dividends not significantly below the company's own historical distribution average. Second, earnings cash flow quality is assessed by screening for companies with superior profit cash conversion using net operating income to total profit ratios, measuring free cash flow coverage of dividends through the FCFF/DPS ratio, while also considering cash flow improvement trends. Third, valuation attractiveness favors targets where the spread between trailing twelve-month dividend yield and the risk-free rate sits at historically high percentile levels.

Key Perspectives from Industrial Securities:

The dividend asset class has completed a round of valuation recovery, yet its allocation value has not been exhausted. Valuations have returned to a relatively neutral range from late-June lows. As of August 31, 2026, the CSI Dividend and Dividend Low Volatility indices trade at PE-TTM multiples of 8.7x and 8.5x respectively, both at the mean plus one standard deviation level over the past year. In the current low-interest-rate environment, the spread between dividend index yields and government bond yields remains above historical averages: both indices offer trailing twelve-month dividend yields of 4.2%, with spreads relative to the 10-year China government bond yield sitting at the 54.9% and 54.2% percentiles of the past decade respectively.

On the capital flows front, the dividend sector is witnessing strengthening long-term allocation forces while short-term trading capital weakens. On the insurance capital side, overall equity allocation ratios are rising, and within equity holdings, there is a continued tilt toward dividend assets. In Q2 2026, insurance (life and pension) holdings in stocks and securities investment funds totaled RMB 6.4 trillion, up 8.3% quarter-over-quarter, lifting the share of total funds under management to 16.2%, a 0.7 percentage point improvement and the largest quarterly increase since Q3 2025. As of Q2 2026, insurance heavy-holding dividend assets reached RMB 488.38 billion, representing 30.4% of total insurance equity holdings, a proportion that has been on an upward trajectory since Q3 2024. On the ETF front, beyond the subscription and redemption activity of dividend ETFs themselves, broad-based index ETFs also serve as an important variable influencing dividend sector capital flows, as inflows into broad-based ETFs indirectly contribute incremental capital to the dividend segment through passive allocation to constituent stocks. Dividend ETFs saw net outflows of RMB 1.8 billion in July and RMB 7.6 billion in August, with concentrated outflows occurring between July 20 and August 7, accumulating approximately RMB 11.4 billion in net outflows during that period. Estimates suggest that in July, broad-based ETFs contributed approximately RMB 14 billion in passive net inflows to the dividend sector, which shifted to roughly RMB 5.4 billion in passive net outflows in August.

Reviewing domestic and international dividend assets reveals that the essence of high-quality dividends lies not in static high yields, but in stable and sustainable dividend payout capabilities. From a valuation framework perspective, the spread between trailing dividend yield and the risk-free rate forms the valuation floor, while sustained DPS growth determines the upside potential. When the spread sits at historically high levels, the asset offers sufficient compensation relative to bonds, providing favorable margin of safety and risk-reward dynamics. When share price appreciation drives static dividend yields lower, further valuation expansion requires sustained DPS growth to justify. First, the dividend yield spread defines the valuation bottom. Taking American Water Works as an example, when the Federal Reserve shifted to easing in late 2018 and long-term rates declined, the spread between the stock's dividend yield and US Treasury yields turned positive from negative and continued to widen, driving a trend of share price appreciation. In June 2021, a rebound in US Treasury yields narrowed the spread toward zero, with the stock reaching a cyclical peak in September. Second, the DPS growth rate spread constrains the valuation ceiling. Duke Energy's share price shows a high positive correlation with the spread between its DPS year-over-year growth rate and the 10-year US Treasury yield. From 2015 to 2018, DPS growth accelerated from 2.9% to 4.2%, the spread turned positive and widened, and shares began rising from late 2015. In 2019, DPS growth decelerated first, and combined with rising Treasury yields in early 2020, the spread converged and turned negative, weakening dividend support for valuations, with the stock reaching a cyclical top in April 2020.

Applying this framework to A-shares, using China Yangtze Power as a case study: first, backtesting based on the historical percentile of the spread between trailing dividend yield and the 10-year China government bond yield over the past five years shows strong differentiation in forward 12-month returns. When the spread falls in the 80%-100% and 60%-80% percentiles, average forward 12-month returns are 10.5% and 9.8%, with upside probabilities of 66.1% and 75.7% respectively. Conversely, when the spread is in the low 0%-20% percentile, average forward 12-month returns drop to 6.7%, with an upside probability of only 4.3%. Second, comparing the spread between DPS year-over-year growth and the 10-year China government bond yield against the share price reveals synchronized movements overall. Since 2018, the negative spread has been steadily narrowing, turning positive in early 2021, with the share price trending upward until reaching a cyclical high in July 2022. As DPS growth decelerated and the spread declined, the share price entered a consolidation phase from mid-2022 through early 2024. A temporary divergence emerged between mid-2023 and mid-2024, when the market-wide dividend style dominated, coupled with expectations of a higher long-term profit center following the Wudongde and Baihetan hydropower projects, shifting the market's trading focus from realized DPS growth to steady-state earnings expectations. Entering 2025, the share price and spread have re-established a positive correlation.

On August 21, the National Financial Regulatory Administration issued the "Insurance Company Asset and Liability Management Measures," further strengthening the requirement for insurers to match asset returns with liability costs. With maturing high-yield bonds and declining yields on new fixed-income investments, life insurers' net investment returns are under pressure. The duration gap has been converted to a monitoring indicator, weakening the demand for insurers to hold ultra-long bonds. Additionally, regulators are de-emphasizing the impact of bond fair value fluctuations and placing greater weight on realizable, actual investment returns. In this context, high-dividend equities with stable payout attributes can enhance portfolio recurring income and offset the downward pressure on fixed-income returns. Looking ahead, the demand for high-dividend allocation from insurance capital will continue to expand, with allocation preferences further shifting toward high-quality dividend assets characterized by stable earnings, ample cash flow, and sustainable payouts.

Risk Factors: Risk-free rate increases, significant macroeconomic fluctuations, and industrial policy changes.