Why should you allocate to dividend-focused index funds amid stock market volatility and inflation?

Most investors may have the following confusion recently: opening market software, the market fluctuates up and down; going to refuel, the oil price is now much higher than before, the once casually said “92, fill it up!” now makes you hesitate; the prices of social production materials and consumer goods are also rising, and money seems to be losing value — this is the dual challenge we face today: “stock market volatility” and “inflation.”

In this context, investors are caught in a dilemma: want to make money but fear losing principal in market swings; want to preserve their money but fear inflation eroding its value. Dividend assets are the key to solving this dilemma, and index funds are the crucial tool for deployment.

• Why are dividend assets called “rent-collecting” assets?

Dividend assets are nicknamed “rent-collecting” assets, and the core reason is simple: the companies behind these assets are stable earners, have enough cash on hand, and are willing to distribute their profits to investors via cash dividends. Buying dividend assets is like renting out a house—you receive “rent” regularly.

Financial management values “stability” and “simplicity” most. The companies behind dividend assets are mostly concentrated in industries like coal, oil, transportation, and banking, which have two major advantages that precisely meet our needs.

The first advantage: resistance to inflation and protection against depreciation. When inflation occurs, the prices of products from coal, oil, and similar industries tend to rise, allowing companies to earn more money, and their stock prices often follow suit.

The second advantage: stable cash flow that can withstand stock market fluctuations. During market volatility, many stocks fluctuate several points in a day, causing panic. The biggest benefit of dividend assets is their “stability”—compared to growth assets, their stock price volatility is smaller; revenue and profits in transportation, banking, and other “ballast” industries are relatively stable, providing steady cash flow and dividends.

• Investment practice: how to deploy dividend assets?

Many investors ask: I know dividend assets are good, but how to buy them? Instead of directly buying individual stocks, using index funds for deployment is simple, with lower costs and risks. In the A-share market, there are two types of indices that allow direct deployment of dividend assets, worth paying attention to.

The first type is dividend indices as defensive hedges. For example, the CSI Dividend Index selects companies with stable dividends and high dividend yields. The top three industries—banking, coal, and transportation—together account for over 50% of the weight, providing inflation resistance and stable cash flow; also, the CSI Low Volatility Dividend Index, which has stricter requirements on stock price fluctuations, with banks making up 50%, has a more prominent defensive attribute.

Corresponding to these indices, the E Fund CSI Dividend ETF Connect Fund (A/C/Y: 009051/009052/022925) and the E Fund CSI Low Volatility Dividend ETF Connect Fund (A/C: 020602/020603) both charge a management fee of 0.15% per year, offering investors low-cost tools.

The second type is the “Dividend+” indices, which are both offensive and defensive. For example, the Guozheng Free Cash Flow Index consists of companies with “particularly abundant cash flow,” including oil refining, non-ferrous metals, and other “inflation-benefiting” industries. These companies can pay dividends and also reinvest for expansion, combining “dividends” and “flexibility.” Corresponding products include the E Fund Guozheng Free Cash Flow ETF Connect Fund (A/C: 024566/024567); there’s also the more comprehensive Guozheng Value 100 Index, which considers high dividend yield along with low P/E ratio and high cash flow rate—high dividend yield indicates dividend security, low P/E suggests the stock isn’t expensive, and high cash flow rate means stable earnings. The corresponding product is the E Fund Guozheng Value 100 ETF Connect Fund (A/C: 025497/025498).

If you have a stock account, you can also deploy in the on-market ETFs: Dividend ETF E Fund (515180), Low Volatility Dividend ETF E Fund (563020), Free Cash Flow ETF E Fund (159222), and Value ETF E Fund (159263).

For investors, in the current market environment, the goal of financial management is “stability”—first preserve principal, resist inflation, then gradually grow. It’s advisable to use dividend indices as the core defensive position, combined with the “Dividend+” indices that are both offensive and defensive, forming a “combo” to cope with “stock market volatility” and “inflation.”