Hello! I'm your financial analysis assistant. This article from the Shanghai Stock Exchange's Investor Service Center is essentially a compulsory lesson for all stock investors about "dividends." It uses very intuitive data comparisons to break the common misconception that trading stocks is about buying low and selling high to make a profit difference, revealing that dividends are the often overlooked "hidden gold mine" in the long-term returns of A-share markets.
Below, I will break down the core logic of this article into five key points in plain language to help you fully understand the implications.
1. Core Conclusion: Dividends Are Not a Promise, but Real Extraordinary Returns
In one sentence: If you only look at the fluctuations in stock prices (such as the Shanghai Composite Index), you might think the market hasn't risen much in recent years. But if you also include the money companies distribute to their shareholders (as measured by the Shanghai Income Index), you'll find that you've actually earned an additional 2.6% to 3.5% per year.
Detailed Explanation:
The article presents a startling comparison:
- Shanghai Composite Index (pink line): This is the index that most people use, which only reflects changes in stock prices. When companies pay dividends, stock prices usually fall slightly (due to dividend distribution), making this index seem to show less growth.
- Shanghai Income Index (blue line): This index is designed to measure total returns. Its calculation takes into account both stock price changes and dividends. Even if stock prices drop, any dividends paid out are added back to the total return.
The Numbers Speak:
Since the launch of this index in July 2019, the blue line has surpassed the pink line by 630 points. These 630 points represent the actual dividends distributed by listed companies to their shareholders, equivalent to an additional annual return of 2.6% to 3.5%.
What does this mean? Even if the market remains stagnant, as long as companies continue to make profits and pay dividends, your investment will grow. This is what's known as "extraordinary return"—it's your rightful share of the company's earnings, not a result of others' losses.
2. Understanding the Trend: Why Are the Two Lines Diverging Increasingly?
In one sentence: The longer the time period, the more significant the cumulative effect of dividends becomes. It's like a snowball effect: the more dividends are distributed, the wider the gap between the two lines.
Detailed Explanation:
The article uses a metaphor of a "bell curve" to illustrate this trend:
- Initial Phase: When the index was first introduced, the two lines were almost identical, with a difference of only 2%.
- Mid-term: After a few years, the gap widened to 8%.
- Currently: The gap has expanded to 14%.
Why is this happening?
Dividends are distributed annually, so over time, the cumulative effect becomes more pronounced. Each year, after the annual reports are released, it's the peak period for dividend distribution. The extra money received from dividends remains in your total returns, while the stock price index reflects only the portion of earnings that hasn't been distributed as dividends. As a result, the gap between the two lines continues to widen, indicating that companies are increasingly rewarding their shareholders.
3. Underlying Logic: Doubling Dividends Indicates Real Profit Growth
In one sentence: The total dividend amount in the Shanghai market has doubled from 1 trillion to 2 trillion, showing that companies are not just relying on past earnings but are continuously creating new value.
Detailed Explanation:
Some might wonder if the increase in dividends is due to a larger number of listed companies. The article provides concrete evidence: the absolute amount of dividends has soared.
- 6 years ago: The annual dividend total was just over 1 trillion.
- Now: It has reached 2 trillion.
What does this indicate? Dividends come from a company's net profits. If a company doesn't make money or uses its profits for unnecessary expansion or poor investments, it can't afford to pay out large dividends. The doubling of the dividend total directly demonstrates that the overall profitability of listed companies in the Shanghai market is improving. It's like a company that used to earn 100 yuan and distribute 10 yuan in dividends; now it earns 200 yuan and distributes 20 yuan—although the percentage remains the same, the absolute amount has increased. This is a clear sign of value creation. As the economy develops and company quality improves, this trend is expected to continue, potentially leading to a gap of even 100% in dividend returns.
4. Deep Analysis: Why Has EPS Increased Tenfold, but the Index Not?
In one sentence: Although companies' profitability (EPS) has increased tenfold, stock prices are also influenced by valuation. In the past, prices were inflated, but now valuations have become more reasonable, providing a better foundation for stock prices.
Detailed Explanation:
The average earnings per share (EPS) in the Shanghai market has increased tenfold over the past 20 years.
Why hasn't the index increased tenfold accordingly? The reason lies in changes in the price-earnings ratio (PE):
- 2007 Bull Market: Valuations were extremely high, with PE reaching 44 times. This meant stock prices included a lot of speculation and emotional factors.
- After 2015: PE dropped to around 13 times, reflecting more realistic valuations.
- Currently: PE is around 16 times.
The Logic:
Stock price = EPS × PE. Even though EPS has increased tenfold, the lower PE has diluted the index's growth. However, the article points out that as EPS continues to rise, the "base" for stock prices is also increasing. What used to be a bubble at 3000 points may now represent a more reasonable valuation. Companies are now earning more, providing a stronger foundation for stock prices. You don't need to expect the index to increase tenfold, but you should recognize that current prices are more valuable than they were in 2007, thanks to the steady growth in dividends and company performance.
5. Investment Guidance: Shift from a Gamble Mindset to a Shareholder Mindset
In one sentence: Stop thinking about taking money from others (through speculation) and focus on getting money from the companies themselves (through dividends). Follow the trend of increasing dividends and enjoy the annual additional return of about 105 points.
Detailed Explanation:
This is the article's final advice for investors:
- Old mindset (gambling): Focusing on stock price movements and trying to predict market peaks and bottoms, expecting profits or losses based on price changes. This is a zero-sum or even negative-sum game (when considering fees).
- New mindset (shareholder): Think of yourself as a partner in the company. When you buy stocks, you buy a portion of the company. When the company makes a profit and distributes dividends, you receive a portion of that profit; when the company performs well and stock prices rise, you benefit further.
What to Do:
1. Focus on dividends: When choosing stocks, consider whether they have a history of consistent and stable dividend payments.
2. Hold for the Long Term: The power of dividends lies in compounding and time. Only by holding stocks for the long term can you reap the additional 2.6% to 3.5% annual returns.
3. Ignore Short-Term Fluctuations: Even if the market declines, as long as the company's fundamentals are strong and it continues to pay dividends, your total returns (stock price + dividends) may not decrease significantly.
In Conclusion: The core value of this article is to change our perspective. It shows that A-share markets offer more than just speculation. For long-term investors, dividends represent a reliable, predictable, and growing source of income. The additional 105 points (about 3% annual return) is a clear signal from companies: "We are creating value and rewarding our shareholders." By embracing this logic, you can move from being a gambler to a shareholder with a more stable and rewarding investment approach.