Take you to discover high-dividend companies

Views 19KAug 9, 2023

Skillfully use these three indicators to mine high dividend companies

When we invest in a company, there are only two ways to make money: to earn capital gains from rising share prices, or to receive real cash through the company's dividend. Among them, the rise and fall of the stock price can not be controlled, but the dividend payout is optional. After all, whether a company pays a dividend all the year round can be seen from the past data.

Therefore, high-interest stocks can be attacked and retreated to a certain extent, which is the choice of many sound investors. So, high dividend individual stocks, in addition to stable dividends, in terms of return on capital relative to the average trend of the market, is there an extra bonus? What indicators should be used for further screening of high dividend stocks? Let's take a look.

Does high dividend add to the rate of return on capital?

If you invest in individual stocks with high dividends, you can not only get a stable dividend, but also have more expectations on capital gains, of course, it is the most ideal state. So is this assumption true? We can find some answers from the strategic data designed by the National Finance and Securities Research Institute in 2018.

The strategy goes like this:

1. First of all, make a ranking of the dividend yield of the retroactive 12-month cumulative dividend relative to the current stock price.

2. Then select the top 100 Hong Kong stocks with the highest dividend yield, buy them with the same weight and hold them for half a year, and calculate the yield.

3. After the expiration of half a year, update the dividend yield ranking and buy the top 100 stocks after the update.

4. and so on, renew the position every half a year, and calculate the cumulative rate of return.

The cumulative rate of return of the strategy is shown in the following figure, and the backtest time of the strategy is nearly 18 years, which should be very representative.

(data source, Guojin Securities, Niuniu classroom arrangement)

We can see that the yield of the high dividend strategy far outperformed that of the Hang Seng Index over the same period. This shows that our assumption is valid, that is to say, companies with high dividend yields also have an advantage in terms of long-term capital gains in addition to dividends.

Second, how to select high dividend stocks?

So, since high-dividend stocks have advantages in terms of dividends and capital gains, how to select them? From the perspective of business operation, we explore the fundamental logic behind stabilizing high dividends. On this basis, we will screen out stock pools that are expected to pay higher dividends in the long run in the future.

Let us first consider the following angles, including:

1. The revenue scale of the company. Companies with large revenues tend to have competitive advantages such as economies of scale.

2. Return on equity (ROE). The higher the ROE, the higher the barriers to the business model and the better profitability.

3. Return on capital (ROIC). On the basis of ROE, further consider the impact of leveraged funds.

4. Cash flow of operating activities / operating income. Consider the difficulty of repayment of the product.

5. Dividend payment rate. This is the subjective will of the company to distribute profits.

We use the above five potential angles to find out several significant factors that affect the dividend yield. Finally, let's find out three indicators and take a look at them.

1. The revenue scale of the company

The leading enterprises in the industry have more resources to participate in the market competition, and build their own industry barriers, there are scale advantages, the overall competitive advantage is strong, so there may be more opportunities to obtain long-term stable benefits.

We divide it according to the level of operating income: (1) less than 10 billion; (2) 100-50 billion; (3) more than 50 billion; divided into three groups for comparison, the dividend yield distribution results are as follows:

Looking at the chart data, we can draw two conclusions:

First, the size of corporate revenue has little impact on the dividend yield as a whole. Because there is no very significant difference in the average dividend yield among companies in different income ranges.

Second, companies with middle income (10-50 billion) have relatively high dividend yields. This may be because these companies are not small, many of them are leaders in the segment, and when they have no obvious desire to expand, they are more willing to pay dividends, so they have higher dividend yields.

2. Return on net assets

Return on equity (ROE), also known as return on equity, is used to measure the level of return on a company's own capital. Return on net assets = net profit margin x total asset turnover x financial leverage ratio.

Therefore, companies with high ROE generally have one or more of the following capabilities.

(1) products or services with competitive barriers lead to higher net profit margins.

(2) High operational efficiency, resulting in high turnover of total assets.

(3) higher bargaining power of upstream and downstream brings higher financial leverage. For example, upstream accounts receivable or downstream advances and low-interest loans will lead to an increase in the level of debt.

We are also divided according to the ROE level: (1) less than 10%; (2) 10-20%; (3) above 20%; divided into three groups for comparison, the results are as follows:

Looking at the chart data, we can see that companies with higher ROE usually have higher dividend yield levels. In the part of ROE companies with more than 10%, except that the dividend yield of companies with ROE above 20% was slightly lower in 2018, the higher the ROE, the higher the dividend yield in other years.

This also shows that companies with higher ROE usually have very strong competition barriers in some way, so they have the ability to pay more dividends.

3. Rate of return on capital

Return on capital (ROIC) = (net profit + financial expenses) / (net assets + interest-bearing liabilities), which is somewhat similar to ROE, but takes more into account the impact of financial leverage, which is used to measure the efficiency of all invested funds.

We divide it into three groups according to the ROIC level: (1) less than 10%; (2) 10-20%; and (3) above 20%. The results are as follows:

The data in this chart is similar to the ROE chart, and companies with higher ROIC also have higher dividend yield levels. For companies with more than 10 per cent of ROIC, except for companies with more than 20 per cent ROIC, which had slightly lower dividend yields in 2018, in other years, the higher the ROIC, the higher the dividend yield.

This is because companies with higher ROIC can make more money with the same amount of money. The higher the ROIC, the less money it takes to start a new business, and the ability to use more profits to pay dividends.

4. Cash inflow from operating activities / operating income

Cash inflow from operating activities / operating income usually indicates the progress of the company's payback after selling goods. the larger the index, the stronger bargaining power of the company to the downstream (which may be dealers or other channels), and the less accounts receivable. Cash is returned quickly. On the contrary, if the index of the company is small, the downstream pressure is more serious, and the cash flow is not very good, then it may be difficult to distribute dividends in the long run.

We divide it according to the value of cash inflow from operating activities / operating income: (1) less than 30%; (2) 30-60%; and (3) above 60%, which are divided into three groups for comparison. The results are as follows:

On the whole, the result is not significant, only the companies with more difficult collection in 2018 have the lowest dividend yield. This shows that whether sufficient cash is received from business activities may not be sufficient to determine whether the company pays dividends and the extent to which they pay dividends. For companies with a more mature business model, their dividends are also related to subsequent operating expectations, and the proportion of cash received from current sales of goods may have little impact on long-term expectations.

5. Dividend payout rate

Dividend payout rate is also called dividend payout rate, which refers to the proportion of dividends in net profit. If the dividend payment rate of the company is high, it is clear that the company is willing to distribute the profits to the shareholders.

We divide it according to the level of dividend payment rate: (1) 0-35%; (2) 35-70%; (3) above 70%, divided into three groups for comparison. The results are as follows:

We see that the higher the dividend payout rate is, the higher the overall dividend yield is. Companies that are willing to distribute profits to minority shareholders pay more attention to shareholders' rights and interests and are more likely to pay dividends in the future.

Based on the analysis of the above five sets of data, we can see that the three indicators that have a significant positive impact on the dividend yield are the return on net assets, the return on capital and the dividend payout rate. In other words, the source of long-term high dividends is the profitability of good competitive barriers and a better business model, companies that can start new business with less money and are willing to distribute money to shareholders. These companies are more likely to be able to pay higher dividends steadily over a long period of time.

III. Stock pool screening

Based on the above data analysis, we set four conditions to filter the stock pool:

1. The return on net assets for three consecutive years from 2018 to 2020 is more than 10%.

2. The rate of return on capital for three consecutive years from 2018 to 2020 is more than 10%.

3. The proportion of cash dividends for three consecutive years from 2018 to 2020 is more than 35%.

4. Considering the effectiveness of the current period of the study, the dividend yield on the latest closing date (as of mid-April) is more than 3%.

After the screening of the above conditions, we get the following stock pool through the wind database. The stocks in the stock pool are screened out through the data, which are only for display and cannot be used as investment suggestions. In the following article, we will delve deeper into several companies in the stock pool.

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.

Recommended