In recent years, the regulatory landscape in China has undergone significant changes aimed at enhancing corporate governance and investor confidenceOne of the most notable shifts has been in the area of cash dividends issued by publicly listed companiesWith government authorities actively guiding firms towards more generous cash distributions, this trend has shown remarkable results.

As of the first three quarters of 2024, total cash dividends disbursed by publicly listed companies surged to an impressive 417.1 billion yuan, marking an astonishing year-on-year increase of 86.62%. This upward trajectory is not merely a statistical anomaly; it reflects a deep-rooted shift in corporate attitudes toward shareholder returnsFollowing these developments, we also witnessed a doubling in both the number and scale of dividend exchange-traded funds (ETFs), which have become increasingly popular among institutional investors looking to stabilize their portfolios amidst fluctuating market conditions.

Beginning January 1, 2025, the China Securities Depository and Clearing Corporation has introduced a favorable policy wherein the transaction fees associated with cash dividend distributions for A-shares in both the Shanghai and Shenzhen markets will be slashed by half

Specifically, the fee will be set at 0.5‰ of the total cash distributed, with any portion exceeding 1.5 million yuan being exempt from applicable feesThis move is anticipated to lighten the financial burden on companies while further incentivizing them to increase their dividend payouts.

On the same day, the State-Owned Assets Supervision and Administration Commission (SASAC) released new guidelines for state-owned enterprises (SOEs), urging them to instill a culture of investor return among their controlling listed companiesThe guidelines emphasize the importance of enhancing the frequency of cash dividends, optimizing the dividend payout schedule, and increasing the overall proportion of cash returned to shareholdersThe immediate effects of these directives were evident as, on December 18, a day after the announcements, various dividend indices experienced notable gains, with the CSI Dividend Index, the CSI State-Owned Enterprises Dividend Index, and the CSI Central Enterprises Dividend Index recording increments of 0.62%, 0.67%, and 1.00% respectively

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The Hong Kong Stock Connect central enterprises dividend index even soared by 1.22%.

By December 23, the performance of these indices since the beginning of 2024 was remarkable, posting increases of 10.17%, 11.76%, 22.07%, and a staggering 27.20%. This sharp rise illustrates the market's enthusiastic reception to the policy changes and the companies' responses to the heightened focus on shareholder value.

In tandem with these developments, the number of dividend ETFs tracking various dividend indices doubled this year, rising from 20 at the beginning of 2023 to 39, with total assets swelling from 42 billion yuan to an impressive 96.6 billion yuanNotably, institutional investors accounted for a growing share of these ETFs, holding 56.83% of the total by mid-year, an increase of 2.69 percentage points from the start of 2023.

The concerted regulatory push and the augmented dividend distributions reflect a larger strategy focused on sustainable corporate practices

The SASAC's recommendations underscore the necessity for SOEs to develop reasonable and sustainable profit distribution policies that factor in industry characteristics, profitability, and cash flow considerationsThis holistic approach aims not just at immediate shareholder gratification but at nurturing stability and predictability in cash dividend practices.

In light of this guidance, boards of directors are encouraged to devise differentiated cash dividend policies that meet varying organizational circumstancesPenalties have been clarified; the China Securities Regulatory Commission (CSRC) will impose measures on companies that lack clarity in shareholder reward planning or fail to disclose their cash dividend policies in regular reportsSuch lapses will be recorded in the companies' compliance archives and could impact their credibility during refinancing or restructuring efforts.

The demand for increased cash dividends has indeed transformed the market landscape

According to data from Dongfang Wealth, the number of companies disbursing dividends surged from 249 in the same period of 2023 to 855, significantly increasing the total cash dividends from 223.5 billion yuan to 417.1 billion yuan, an increase of 86.62%.

From an industry perspective, 28 out of 31 sectors reported dividend distributions in the first three quarters of 2023 (excluding banking, real estate, and diversified industries), whereas all 31 sectors issued dividends in 2024 with positive growth year-on-yearThis widespread adoption of the dividend practice is indicative of an evolving corporate ethos that places a greater emphasis on sustainable returns to investors.

The proliferation of dividend ETFs is a telling sign of how intellectual capital flows into more stable and reliable investment avenues

In the broader investment ecosystem, the presence of low-interest rate environments has further bolstered the appeal of dividend ETFs, making them a focal point for mutual funds in 2024.

Data from Dongfang Wealth shows that 2024 has already seen the establishment of a record 19 new dividend ETFs, making up approximately 48.72% of the total number of such products available in the marketThe historical context is notable—that the first dividend ETF, the Huatai-PB Dividend ETF, only appeared in November 2006. It wasn't until 2010 that the second ETF was introduced, followed by the third in 2018. Growth picked up between 2019 and 2021, with four, three, and two new ETFs launched respectively, but there were none in 2022. In stark contrast, 2023 saw eight new offerings, leading to a crescendo in 2024.

As for investment categories, until 2024, the 20 dividend ETFs listed were primarily stock ETFs focused on A-shares, with only one cross-border ETF

However, in 2024, 12 of the newly issued 19 dividend ETFs remained stock-focused, while seven were cross-border ETFs, hovering around 36.84% of the newly listed products for the yearThis diversification indicates an evolving market that now embraces a broader range of index types for these ETFs.

Prior to 2024, the 14 different indices tracked by existing dividend ETFs included 13 A-share indices and one offshore indexThe newly launched ETFs this year target ten different indices, among which five are novel additions, including the Shanghai Stock Exchange State-Owned Enterprises Dividend Index and several new cross-border indices that broaden the investment scope significantly.

To summarize, as of December 23, the total set of indices tracked by dividend ETFs amounts to 19. The ETFs focusing on the CSI Dividend and Dividend Low Volatility indices have the highest offerings, with six ETF products each, while those tracking the Dividend Low Volatility 100 Index feature four products

The index tracking the National New Hong Kong Stock Connect Central Enterprise Dividend Index ranks third with three products.

From the perspective of institutional investors, there has been a noticeable uptick in engagement with dividend ETFsBy year-end 2023, a total of 17 public investment institutions managed listed dividend ETFs, while this number climbed to 25 by December 23, 2024. The newly added players included well-known names like E fund, GF Fund, Da Cheng Fund, and Xinhua Fund.

Among these, E fund started the year with two innovative productsThe pace of growth in the dividend ETF sector is not just encouraging for investors seeking stable income; it also reflects a broader trend of institutional capital flowing into structured and sound investment opportunities amidst a dynamically changing market landscape.

As investor sentiment shifts over time, understanding the growth trajectory of dividend ETFs and their interplay with corporate dividend policies can offer valuable insights