As deposit rates continue to decline, middle-aged investors are redirecting funds from maturing savings into bank stocks, lured by dividend yields that far outpace traditional bank interest. This shift comes as the banking sector, historically overlooked, has quietly surged, with shares of major lenders hitting record highs in recent sessions.
Beijing-based investor Fang Yuan, aged 36, told local media that she decided to buy bank stocks early this year after her bank deposit matured, frustrated by low interest rates. She purchased shares of China Merchants Bank Co Ltd at around 39 yuan per share in March and has since realized a paper profit of 3,837 yuan, reducing her average cost to 37.5 yuan per share through additional purchases and dividends. Despite short-term price fluctuations, she remains committed to a long-term income strategy, citing the stock's roughly 5% dividend yield.
Many investors echo Fang's approach, pivoting to bank stocks and dividend-focused ETFs in a low-rate environment. Li Li, a post-85 investor, began buying bank stocks last year, including Industrial and Commercial Bank of China Ltd, China Construction Bank Corp, Agricultural Bank of China Ltd, and China Merchants Bank. She bought Agricultural Bank of China at around 5 yuan per share in January last year, selling at 7.99 yuan in October for a net profit of 4,118 yuan. As of July 30, she still holds shares of ICBC, CCB, and China Merchants Bank, with gains of 24%, 22%, and 10%, respectively, on those positions. She describes the experience as "steady happiness" but remains torn, regretting not buying more while fearing a pullback after record highs.
Another investor, Li Feng from Anhui, started building a bank stock portfolio last February, focusing on valuation and growth. His holdings include China Merchants Bank, Industrial Bank Co Ltd, and Bank of Hangzhou Co Ltd. He targets a combined return of 10% from dividends and price appreciation. His total portfolio is valued at 860,000 yuan, with profits of 150,000 yuan, of which Bank of Hangzhou alone contributed nearly 50,000 yuan, yielding a 35% return. He believes a long-term, dividend-focused strategy suits ordinary investors best.
Why consider bank stocks now?
Data from Wind shows that as of July 30, eight of the 42 A-share listed banks had trailing 12-month dividend yields exceeding 5%. Hua Xia Bank Co Ltd led with 5.97%, followed by Industrial Bank, China Everbright Bank Co Ltd, and Ping An Bank Co Ltd. Others like China Merchants Bank, China CITIC Bank Corp Ltd, Bank of Chengdu Co Ltd, Bank of Jiangsu Co Ltd, and Bank of Nanjing Co Ltd offered yields between 4% and 5%. In contrast, smaller banks like Bank of Qingdao Co Ltd and Bank of Xi'an Co Ltd had lower yields of 3.05% and 2.72%, respectively, while Bank of Zhengzhou Co Ltd has not paid cash dividends for years.
Meanwhile, deposit rates at major banks have fallen below 2%. For example, Industrial and Commercial Bank of China offers annual rates of 0.8% for three-month deposits, 1% for six months, 1.1% for one year, 1.2% for two years, and 1.55% for three- and five-year terms. Even its personal pension five-year product yields only 1.60%.
Why just a high dividend yield isn't enough?
Investing in bank stocks is not risk-free, and price volatility remains a key concern. The A-share banking sector has risen 2.41% year-to-date, but with significant divergence. Bank of Qingdao surged 36%, while Bank of Chengdu, China Construction Bank, and Bank of Ningbo Co Ltd each gained over 20%, with CCB and ICBC hitting record highs. Conversely, 13 bank stocks have declined, including Shanghai Pudong Development Bank Co Ltd (down 18.26%), Ruifeng Bank Co Ltd (down 7.70%), Agricultural Bank of China (down 5.61%), and Bank of Zhengzhou (down 4.15%).
Investor Qian Hao, who bought China Everbright Bank late last year, saw his position fall 5% despite three rounds of price averaging, as the stock continued to decline after an initial dip. Tian Lihui, a finance professor at Nankai University, warns that deposits and bank stocks are fundamentally different. Deposits are a creditor relationship, insured and offering fixed returns with principal safety. Bank stocks are equity, with returns from dividends and capital gains but subject to price risk. A key issue is the ex-dividend mechanism, where stock prices adjust downward after dividend payments, making high yields a redistribution of wealth. Additionally, dividends held for less than one year are taxed at 10% to 20%, reducing net returns. Bank stocks are equity assets, with returns dependent on long-term profitability and valuation recovery, unlike the guaranteed return of deposits.
Where to start?
Tian emphasizes that a high dividend yield relative to deposits does not guarantee better returns. A high yield may result from a falling stock price, reflecting market concerns about asset quality or narrowing interest margins. Deposit rates are low but certain, while bank stock returns must include price performance. If the stock falls more than the dividend yield within a year, total returns are negative. Dividend yields must be assessed alongside payout ratios, capital adequacy, and asset quality; simple comparisons risk falling into a "high dividend trap."
Tian recommends a long-term, stock-selection-focused strategy. First, hold shares for over a year to avoid dividend taxes, as short-term trading can lead to losses from ex-dividend adjustments. Second, prioritize stable dividend payers like major state-owned banks, avoiding banks with inflated yields. Third, use a phased buying and dividend reinvestment approach to lower costs through market volatility. Bank stocks suit medium- to long-term allocation-oriented investors, aiming for "dividends plus valuation recovery," not arbitrage. For those seeking risk-free returns, deposits remain a better choice.