As the midpoint of the year approaches, the A-share market enters its customary "dividend season," and this year is no exception. By early August, hundreds of listed companies had already announced their dividend plans for fiscal 2025. Among these proposals, you will find cases where some companies distribute hundreds of billions of yuan, while others commit payout ratios exceeding 80% or even 100% of their net profit. There are also those offering tempting dividend yields of over 5%, sometimes approaching 10%. Yet, investors familiar with dividend-focused strategies might notice a thought-provoking market phenomenon: many companies that look impressive with short-term payout data are often excluded from red-dividend index constituent lists. Conversely, blue-chip enterprises that maintain a steady dividend rhythm without pursuing one-off mega payouts consistently secure core positions in these indices. Behind this contrast lies a core logic of dividend investing that many ordinary investors overlook. Today, we will explore the reasons why companies paying the highest dividends are not necessarily the best investments, and what kind of companies a red-dividend index truly selects.

A red-dividend index is not a "dividend leaderboard." You might assume it simply picks the top A-share companies by total dividend payout each year and ranks them by yield, but this is far from accurate. Take the CSI Dividend Index as an example: its construction rules involve at least three layers of filters, designed to ensure that the chosen constituents are not fleeting high-payout entities but rather quality enterprises with the genuine ability to sustain dividend distribution. The first filter requires three consecutive years of dividends: a company must have distributed cash dividends in each of the past three fiscal years to enter the candidate pool. This rule directly eliminates those firms that might pay out once after a good year but skip distributions after a loss-making period. The second filter imposes a payout ratio constraint: a company's dividend payout ratio must stay within the 0-100% range, meaning the annual dividend amount cannot exceed current-year net profit. If a company pays out more than it earns, it is either dipping into retained earnings from previous years or borrowing funds to finance the distribution. Such "depleting dividends" are inherently unsustainable, and the index will exclude these companies. The third filter involves ranking by average dividend yield: after passing the first two screens, companies are sorted by their three-year average dividend yield from highest to lowest, with the top 100 stocks selected as constituents. This approach ensures both the "quantity" of dividends and avoids sacrificing stability for short-term high yields. In simple terms, a red-dividend index does not select the companies that pay the most, but rather those that pay the most consistently.

To better understand the index's "dividend aesthetic," the construction rules may seem complex, but concrete examples can illuminate the selection logic, showing which types of high-payout firms are excluded and which are welcomed into the fold. The first category consists of "overdraft-style" high-payout companies, which are filtered out by the index selection process. For instance, Company A reported a net profit of around 9 billion yuan for 2025, yet its announced cash dividend for 2026 totals over 10 billion yuan, resulting in a payout ratio exceeding 100%. Despite distributing dividends continuously over the past three years, this excessive, unsustainable payout disqualifies it from entering the CSI Dividend Index. The second category includes companies with occasional high payouts but unstable records, which are also removed. Company B posted a net profit of roughly 11 billion yuan in 2025 and distributed about 8.5 billion yuan, representing a payout ratio near 80% and a dividend yield of 5.0%. While these single-year figures look stellar, the company still fails to make the index. A review of historical data reveals that its dividends were around 8 billion yuan in 2023 but plummeted to just 2 billion yuan in 2024. Since the CSI Dividend Index ranks constituents by the three-year average dividend yield, this instability dragged down the average, leading to its exclusion. In contrast, consider Company C: its latest annual payout ratio stands at about 90%, indicating a strong willingness to return most profits to shareholders. Furthermore, it has maintained continuous cash dividends for three years with a yield consistently above 5%, striking a balance between a high payout ratio and stable income. This aligns perfectly with the index's criteria of "high yield and sustainability."

The essence of dividend investing is that "stability" matters as much as "generosity." Returning to the initial question of why more dividends do not equate to better companies, the answer is simple: a one-off "big red envelope" is less valuable than a steady annual one. The construction logic of a red-dividend index essentially provides investors with a stock-picking framework for long-term compounding. Only enterprises that distribute dividends continuously and predictably can, through the power of compounding, generate genuine long-term returns for their investors. Meanwhile, companies with abnormally high payout ratios or volatile dividend amounts may appear attractive today, but their future distribution certainty is often poor. Through its three filters, the index automatically weeds out these "seemingly high-quality yet fragile" dividend traps. As risk-free rates continue to decline, relatively stable dividend returns enhance the medium-to-long-term allocation value of dividend assets. As for participation, rather than chasing individual "high-dividend" stocks, investors should consider diversified exposure via a red-dividend index, allowing professionally crafted rules to identify quality companies with sustainable payout capabilities. For investors, selecting dividend index products with lower fees and stronger tool attributes can further reduce long-term holding costs and boost compounding returns. For instance, all dividend index products under Yifangda adopt the industry's lowest annual management fee of 0.15%, and investors can explore low-fee options such as the Dividend Low Volatility ETF Yifangda (563020, feeder funds A/C/Y: 020602/020603/027261), the Dividend ETF Yifangda (515180, feeder funds A/C/Y: 009051/009052/022925), and the Hang Seng Dividend Low Volatility ETF Yifangda (159545, feeder funds A/C: 021457/021458).