The Hong Kong stock market has registered a disappointing “triple fall” since the beginning of the year of the Rooster. But fortunately, the Dow Jones Industrial Average broke above the 20,000 points level again. Hopefully, Hong Kong stocks will be pulled up as a result, and what had been lost would be reclaimed.
I recommended high dividend stocks amidst the stock market slump last year, as I think that high dividend stocks can serve as good offensive and defensive plays. The stock market is now recovering from its slump, and dividend stocks with yield as high as 9 percent are hard to come by. HSBC Holdings (005.HK) offers a yield of around six percent, Yuexiu REIT (405.HK) offers 7.21 percent, and Langham Hospitality Investments Ltd offers 7.65 percent.
Is a dividend yield of six to seven percent still attractive? That depends on how you look at it. Some people think that heightened rate hike expectations are unfavourable to the prices of dividend stocks, but if we were to look at the whole of 2016, the three abovementioned stocks all grew in prices despite the fact that there were rising expectations of the US Federal Reserve interest rate hike. And because of the rise in prices, we no longer see dividend stocks that offer yields of nine, or even eight percent.
The lesson learned is that the expectation of Fed rate hike might not necessarily bring down the prices of dividend stocks. It will only bring down the prices of ultra-low-yield US Treasury bonds.
The Difference between High Dividend Stocks and Low-Yield Bonds
High dividend stocks and low-yield bonds are different after all. Typically, the formula for calculating dividend yield may be represented as follows:
When the price-per-share decreases, but annual dividends per share remain unchanged, dividend yield becomes higher.
Low-yield bonds, on the other hand, saw their prices increase greatly, but the dividend remains unchanged. This explains why the bond yield decreases in percentage.
When one purchases high dividend stocks (at a low price), he can collect high dividends, and also bet on a stock price rebound. Similarly, those who bought low-yield bonds at a high price were probably hoping for the bond prices to rise even further.
Whether it is buying low and betting on rebound, or buying high and betting on prices to rise even higher, both forms of “gambling” have their supporters. But at least, for the case of high dividend stocks, one can still collect high dividends should a rebound fail to take place. This is why I think buying high-dividend stocks serves as both an offensive and a defensive play.
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