If You're Unsure What to Buy, It's Time to Focus on Dividend Stocks... Who Are the High Dividend Stocks?

[Asia Economy Reporter Lee Seon-ae] Investment advice has been raised to pay attention to dividend stocks.

On the 12th, Seongcheol Lim, a researcher at Heungkuk Securities, stated, "Although the KOSPI is trending upward, uncertainty remains due to concerns about inflation and tightening, resulting in a lack of clear momentum and direction, which is expected to continue for some time as we enter the second half of the year." He added, "In this situation, it is necessary to focus on dividend stocks, which show relatively stable performance."

The first reason is seasonality in the second half of the year. Historically, high dividend stocks have shown stronger performance in the second half compared to the first half and the KOSPI. Over the past 20 and 10 years, the average returns of the high dividend index were 7.3% and 4.3%, respectively, outperforming the KOSPI and the first half of the year. In particular, during years when the KOSPI recorded negative returns in the second half?2002 (-15.5%), 2008 (-32.9%), 2011 (-13.1%), 2014 (-4.3%), 2015 (-5.4%), and 2018 (-12.3%)?high dividend stocks outperformed the KOSPI.

The second reason is the performance of high dividend stocks during periods of rising interest rates. It is commonly thought that dividend stocks perform poorly during rising interest rate phases, but this is not always the case. Since 2001, during market interest rate increases of 100 basis points or more, the average absolute return and relative return (compared to the KOSPI) of the high dividend index were 22.7% and -0.4%, respectively, showing better-than-expected performance.

The third reason is the performance of high dividend stocks during periods of rising earnings per share (EPS). Currently, as we enter the recovery phase after COVID-19, the KOSPI's earnings forecasts for 2021 and 2022 have been continuously revised upward, and the 12-month forward EPS has risen about 30.2% since the beginning of the year. Over the past 20 years, during 14 instances of KOSPI EPS increases, the high dividend index recorded an average absolute return and probability of increase of 18.2% and 78.6%, respectively, showing good relative performance compared to the KOSPI.

The fourth reason is strong performance after crisis phases. After past crisis periods such as 2008 (financial crisis) and 2011 (U.S. credit rating downgrade), when volatility expanded significantly, high dividend stocks outperformed the KOSPI for a considerable period during the recovery phase. In particular, after the V-KOSPI (volatility index) exceeded the past average level (+2σ) of 39.4 since 2003, high dividend stocks recorded superior excess returns compared to the KOSPI over the mid to long term.

The fifth reason is valuation attractiveness. Currently, the 12-month forward price-to-earnings ratio (PER) and price-to-book ratio (PBR) of the high dividend index stand at about 8.1 times and 0.7 times, respectively, below the post-2011 averages of 9.2 times and 0.8 times. Although there has been significant recent recovery, the relative strength of the high dividend index compared to the KOSPI still remains below average.

Meanwhile, in the first quarter, the net profit of the high dividend index grew 126% year-over-year, showing better performance than the KOSPI. The second and third quarters are also expected to record excess returns, with recent net profit consensus continuously trending upward.

Researcher Lim emphasized, "Although the index is rising, the current market faces a cyclical rotation without clear direction and scattered uncertainties. Based on the five reasons mentioned above, the investment attractiveness of high dividend stocks is judged to be positive."