In 2025, the Hong Kong stock market showed a significant rebound, with the Hang Seng Index rising over 30% since the beginning of the year. Many traditional blue-chip stocks have also seen their prices recover, reaching levels even higher than before the pandemic. For long-term investors focusing on income stocks, this undoubtedly serves as a validation. However, it also raises a new consideration: Should one cash out at these high levels, or continue to hold for dividends while patiently waiting for further price increases?
Investors in Hong Kong have consistently favored dividend-paying stocks, particularly in sectors like banking, real estate, and utilities. The reasoning is simple: these sectors offer stable business models, large scales, and generous dividends, creating an impression of safety and reliability. However, the notion of steady does not imply that these investments come without risks. As market conditions improve, it’s crucial to reassess the value and role of these stocks, rather than relying solely on dividend yields to make judgments.
So-called dividend stocks aren’t an official classification but rather a term used in the market to describe a group of companies characterized by stable dividends. These stocks can generally be divided into two types: one is high-dividend stocks, which offers a higher yield mainly in cash returns; the other is Dividend Growth Stocks, which may not offer particularly high dividends initially, but has the potential to deliver more attractive total returns in the long run as profits gradually increase.
High-yield stocks are particularly attractive to investors who need a stable cash flow, especially during times of low interest rates when bond yields are less enticing. These types of stocks can provide a relatively stable source of income. However, it’s important to note that a high yield doesn’t necessarily equate to solid fundamentals. Sometimes, an elevated yield occurs due to a significant drop in the stock price. If a company’s earnings aren’t growing or are even declining, tight cash flow may allow for short-term dividend maintenance, but long-term sustainability is not guaranteed.
On the contrary, dividend growth stocks often have lower dividend yields, but as their performance improves, the dividend levels are adjusted upwards annually, and stock prices typically correlate with earnings trends. For investors with a longer time horizon who are willing to endure some volatility, these types of stocks offer greater potential for appreciation.
Unfortunately, many investors tend to fall into a few common traps when dealing with dividend stocks, ultimately missing out on truly valuable opportunities.
The first blind spot is treating dividends as extra income.
Many people view dividends as bonus, but in reality, it’s cash distributed by companies from their profits. On the ex-dividend date, stock prices are adjusted, reflecting the conversion of assets from shares to cash, meaning overall wealth doesn’t actually increase. If one purely considers the dividend numbers as the basis for investment decisions, they easily overlook the concept of total return: what truly impacts investors’ assets is the performance of the stock price plus the dividends, known as total return, rather than just the dividend yield.
The second blind spot is the misconception that high interest rates equate to good companies.
While a high dividend yield is undeniably attractive, it may conceal risks such as declining performance or a loss of confidence in the capital market. Some companies may even resort to borrowing to maintain their dividend levels, which not only indicates less-than-ideal profitability but also puts pressure on their capital structure. A payout ratio that is excessively high means that a company allocates a large portion of its earnings for distribution, leaving limited room for reinvestment, which naturally constrains future growth potential.
The third blind spot is mistakenly considering dividends as a stable source of cash flow.
Although many companies in Hong Kong maintain a long-term stable dividend payout, distributing dividends is not an obligation set by a contract. When facing declining profits, operational pressures, or policy changes, companies can adjust their dividend policies at any time. In recent years, many traditional income stocks, including shares in real estate and utilities, have also reduced dividends in response to changes in policy or earnings. For those relying on dividends as a source of income, this kind of change cannot be ignored.
The fourth blind spot is an over-concentration on large local blue-chip stocks
In the Hong Kong market, dividend stocks are concentrated in a few sectors, including banking, real estate, and utilities. Although these companies have scale and history, this type of concentrated investment poses risks from an asset allocation perspective. If there are changes in interest rate policies, market trends, or energy regulatory policies, the entire sector could face simultaneous pressure. Rather than relying solely on a few familiar stocks, it’s advisable for investors to consider a diversified strategy that spans across industries and markets to reduce the asset loss caused by fluctuations in a single sector.
The fifth misconception is the mistaken belief that dividend stocks are suitable for all conservative investors.
For those who are already retired or nearing retirement, stable dividends are indeed an important consideration. However, for younger investors, prematurely concentrating funds in dividend stocks with limited growth potential could mean missing out on the golden period for capital accumulation. Especially now, as market conditions gradually improve and sectors like technology and renewable energy regain attention, relying solely on dividend stocks may not provide sufficient value appreciation. Investors should flexibly adjust the proportion of dividend stocks within their overall asset allocation according to their life stage and financial goals.
To determine whether a dividend-paying stock is worth holding, you cannot simply rely on the dividend yield. A comprehensive evaluation should be made from several perspectives, including the following:
First, there’s the sustainability of dividends. Is the company’s payout ratio too high? Does its free cash flow sufficiently support cash distributions? If future profit growth slows down, does the company have the capacity to maintain its current dividend level? These are all crucial factors in assessing risks.
Next, let’s talk about total return performance. A high annual yield doesn’t necessarily indicate strong long-term performance. Data from some local dividend-paying stocks over the past five years shows that even if the average dividend yield remains above 5%, total returns can lag behind the overall market if the stock price declines during the same period. Meanwhile, some dividend growth stocks, although initially offering lower yields, have stock prices and dividends that continue to increase, resulting in total returns significantly higher than high-yield stocks after five years.
Moreover, the fundamental factors of the industry and individual companies shouldn’t be overlooked. For instance, the real estate sector is influenced by the local property market cycle, the banking industry closely follows interest rate trends, while public utilities are affected by policies and operational costs. Analyzing a company’s balance sheet, profit models, and industry outlook is key to determining whether to hold onto an investment for the long term.
Ultimately, investors should approach this from a holistic asset allocation perspective, pairing income stocks with other assets like bonds, mutual funds, and growth stocks. Striking a balance between stable income and capital appreciation is more sustainable in the long run than solely chasing high-yield returns.
In summary, dividend stocks are indeed an essential part of an investment portfolio, providing investors with a certain level of income and stability. However, in a rapidly changing market with increasing macro risks, relying solely on past experiences for stock selection is no longer sufficient. Dividend stocks aren’t off-limits, but they shouldn’t be held blindly. By avoiding common mistakes and flexibly adjusting allocations according to personal financial goals, dividend stocks can still play their role in Strive for victory amid stability., continuing to accompany investors through the ups and downs of the market.
