Strategy Review: Low-Valuation High-Dividend Bank Stocks with Dividend Reinvestment

1. Long-term Return Source Assessment
   
   Based on performance from 2018 to the present, the portfolio centered on Industrial Bank, China Merchants Bank, and Agricultural Bank of China has experienced a combination of price recovery and high dividends. As of December 16, 2025, Industrial Bank’s share price rose from approximately 17 yuan at the beginning of 2018 to 20.42 yuan, China Merchants Bank from 29 yuan to 41.70 yuan, and Agricultural Bank of China from 3.84 yuan to 7.37 yuan, corresponding to cash returns of about +20%, +44%, and +92% respectively over the period [0]. During phases of slow price growth or even sideways movement, it is difficult to achieve significant gains relying solely on capital appreciation, but stable dividends (most banks in the industry maintain a dividend yield of over 3%, with some individual stocks even reaching over 7%) have become a key driver for reinvestment [1]. Under the dividend reinvestment model, low valuation can amplify the “number of shares + waiting time” effect: low PB provides a margin of safety for buying, high dividends generate funds for reinvestment, and frequent reinvestment significantly increases the total number of shares and future dividend base over time, gradually realizing the “dividend snowball” effect.

2. Transmission Mechanism Between Valuation Repair and Dividend Growth

• Valuation Repair Momentum
  : The current PB of the three banks is all below 1x (Industrial Bank: 0.55x, China Merchants Bank:0.82x, Agricultural Bank of China:0.81x), while P/E also remains in single digits (6-9x)[0]. During phases of improved macro interest rates or risk appetite (such as the emergence of interest rate cut expectations in 2024 and capital focus on dividend styles), the market is willing to gradually raise PB, pushing low valuations towards a reasonable range, thereby bringing additional valuation gains.
• Dividend Growth’s Impetus to Total Returns
  : The cumulative dividends over 8 years are approximately 3.6 million yuan, and the expected dividend of 1.25 million yuan in 2026 means that cash flow accelerates significantly in the later period. Dividend reinvestment expands “unit dividend = number of shares held × dividend per share” over time; shares bought during low valuation phases (small denominator, low unit price) rapidly increase the total share capital through reinvestment; even if the price per share fluctuates, the equity share increased by dividend reinvestment can still stably boost dividend cash flow, thus hedging the volatility risk brought by price fluctuations.
• Complementarity Between Valuation and Dividends
  : The margin of safety brought by undervaluation supports investors to maintain a lower average cost during dividend reinvestment. If the stock price (or industry PB) repairs subsequently, the accumulated share dividends from previous reinvestments will simultaneously enjoy the double benefits of higher book value and dividend growth, realizing the superimposed returns of “dividend growth + valuation recovery”.

3. Practical Recommendations and Risk Warnings

• Continuously Monitor ROE and Asset Quality
  : The dividend capacity of the banking industry is highly dependent on profit stability and capital adequacy ratio. Currently, the ROE of the three banks is in the range of 9%-12%, indicating that profitability and capital efficiency are acceptable [0]. However, future asset quality deterioration or net interest margin narrowing will directly affect dividend growth rate, so it is necessary to track the trend of non-performing loan ratio and provision coverage ratio.
• Pay Attention to Macro Policies and Interest Rate Cycles
  : The monetary policy in 2025 tends to be “moderately loose”, which is conducive to the valuation repair of the banking sector. At the same time, if interest rate cuts lead to compressed net interest margins, it will also weaken the profit trend, so it is necessary to balance the dynamic balance between interest rates and valuations.
• Convert Dividend Reinvestment Plans to Model-Based Tracking
  : Set annual dividend reinvestment targets (e.g., reinvest according to the expected 1.25 million yuan dividend) and compare actual investment returns with pure index returns to further quantify strategy effectiveness.

4. Conclusion
   
   The long-term advantages of the low-valuation high-dividend strategy in A-share bank stocks mainly come from the superimposed effect of “valuation repair + dividend reinvestment”: low PB provides buying opportunities, high dividends provide cash for reinvestment, and the valuation recovery phase amplifies holding returns at a higher multiple. If the industry’s profits remain stable and the dividend policy is not tightened in the future, the strategy can continue to achieve steady long-term compound returns through dividend rolling and capital gains. It is recommended that investors continuously update dividend expectations, dynamically adjust shareholding ratios, consider batch increasing positions when banks are collectively undervalued, and moderately revise positions when valuations are high or policies turn.

[0] Jinling API Data (A-share bank real-time valuation, historical prices and financial indicators)
[1] Yahoo Finance Hong Kong - “2024 Chinese Bank Stocks Deliver Best Performance in Nearly a Decade! Bank Dividend Yield Reaches 8% at Year-End Amid Strong Liquidity” (https://hk.finance.yahoo.com/news/2024中國銀行股跑出近十年最佳表現-銀行股息率高達8-成年末-流量擔當-095849713.html)