The recent FIFA World Cup saw the small African island nation of Cape Verde, with a population of just over 500,000, capture the world's attention. They outperformed Cameroon in qualifiers, advanced from the group stage with three draws, and took Argentina to extra time in the knockout rounds, twice coming from behind to level the score before a narrow defeat.

Without star players or a top-tier squad, how did they achieve this? A rock-solid defensive system was the key.

Investors and sports fans alike understand a fundamental principle: tournaments can produce upsets, but consistent performance determines league standings. The underlying logic of dividend indices aligns closely with Cape Verde's tactical philosophy—using low valuations to build a margin of safety and high dividends to deliver a steady stream of cash flow.

The Defensive DNA of Dividend Indices

The "defensive system" of dividend indices is built on two core metrics.

High dividend yield forms the first line of defense. Companies that can consistently pay stable dividends with a high yield typically have robust operations and strong cash flows. Currently, the CSI Dividend Index offers a yield of 5.4%, the CSI Dividend Low Volatility Index 5.8%, and the Hang Seng Dividend Low Volatility Index 5.9%, all significantly higher than the CSI 300 Index's 2.7%. Dividends themselves represent a visible return stream, while the compounding effect from reinvesting those dividends acts as a powerful amplifier for long-term returns.

Low valuation constitutes the second line of defense. The flip side of a high dividend yield often corresponds naturally to a lower valuation. The current trailing price-to-earnings ratio for the CSI Dividend Index is just 8.0 times, 7.8 times for the CSI Dividend Low Volatility Index, and 7.2 times for the Hang Seng Dividend Low Volatility Index, all far below the CSI 300's 14.4 times. Furthermore, all three dividend indices are trading below their net asset value, equivalent to buying a company's book assets at a discount, providing a clear margin of safety.

High dividends offer cash flow returns, while low valuations cap the downside risk. The synergy of these two defensive lines forms the most solid foundation for a dividend strategy.

However, dividend strategies are not limited to a single tactical formation. The CSI Dividend Index has higher weightings in cyclical sectors like coal and petrochemicals, offering greater upside potential during cyclical upswings. The CSI Dividend Quality Focus Index concentrates on companies with leading profitability metrics, exhibiting stronger offensive characteristics during periods of earnings improvement. The Hang Seng Dividend Low Volatility Index has shown notable performance during windows of improved liquidity in the Hong Kong market. This diversity in style coverage means suitable strategies can be found for different market environments.

Extreme Style Divergence: A Window for Rebalancing Towards Dividends

Looking back at the first half of the year, technology and growth sectors, represented by AI computing and semiconductors, led the market, while traditional value sectors like banking, petrochemicals, and chemicals faced pressure and corrections. However, these very corrections have attracted sustained capital inflows. As of July 10th, dividend-focused ETFs across the market have seen net inflows exceeding 30 billion yuan year-to-date. Among these, the E Fund CSI Dividend Low Volatility ETF (563020) saw net inflows of 8.58 billion yuan, and the E Fund CSI Dividend ETF (515180) saw net inflows of 6.9 billion yuan, ranking first and third, respectively, among all dividend ETFs.

More crucially, following this round of adjustments, the dividend yields of indices like the CSI Dividend, CSI Dividend Low Volatility, and Hang Seng Dividend Low Volatility have returned to historically high levels above 5%, providing a sufficient safety cushion.

Simultaneously, the divergence between growth and value styles has reached an extreme historical range. Historical patterns suggest that when style divergence hits extremes, the market often experiences a mean reversion. Since July, market momentum has broadened compared to earlier periods, with low-valuation sectors beginning to rebound, signaling a potential phase of rebalancing.

Taking a longer-term view, dividend indices have also delivered strong performance. Since 2017, the CSI Dividend Quality Focus Index has achieved an annualized return of 13.7%, while the CSI Dividend, CSI Dividend Low Volatility, and Hang Seng Dividend Low Volatility indices have all posted annualized returns exceeding 7%. Furthermore, they have demonstrated superior risk-adjusted returns compared to the CSI 300 Index.

Building a Portfolio with a Defensive Mindset

The season is long, and falling behind in one match does not determine the final ranking. The core value of dividend assets lies in their consistent dividend cash flows, the safety margin provided by low valuations, and their long-term track record validated by the market. The current extreme style divergence presents a window to reassess defensive allocations.

For investors looking to build such a portfolio, E Fund Management currently offers the largest suite of dividend ETF products among fund managers, with a total of seven ETFs. This lineup provides comprehensive coverage of both the A-share and Hong Kong markets, encompassing single-factor dividend strategies as well as multi-factor approaches like dividend low volatility and dividend quality. Additionally, all seven of these ETFs charge a management fee of 0.15% per annum, placing them in the lowest tier for ETF fees.

Investors without securities accounts can also consider products like the E Fund CSI Dividend Low Volatility ETF Link Fund (A/C/Y: 020602/020603/027261) and the E Fund CSI Dividend ETF Link Fund (A/C/Y: 009051/009052/022925).