Source: Yaya Hong Kong Stock Exchange
Author: flamingoz

Over the past two years, investment in high-yield stocks has remained the main line running through the entire market. Coal has taken the lead in terms of earnings in the 3-year sector, while the China Special Assessment has gone from high dividends to medium dividends. The Chinese market's pursuit of shareholder returns seems to have reached a new level.

Earning interest on shares was originally the most basic meaning of the stock market when it first existed. Buying low and selling high, and making money by trading was nothing more than a product after the securities market developed actively and became liquid.

Looking at US stocks with a long history, high dividend strategies have always existed, but does a high dividend necessarily mean a steady win? However, the long-term performance of US stocks with high dividends is probably at what level. What's even more interesting is that the current high dividends on US stocks seem even more appealing than the Chinese market?

1. High dividend strategies have a long history

First, judging from history, a high dividend is already a long-term viable strategy, which has been tested to a limited extent in various markets. Although the production and preparation of this high-dividend index includes various operational techniques, such as incorporating expected high dividends > redeemed high dividends, regular position changes to control the overall dividend rate, choosing when to reinvest dividends, and considering multiple dimensions such as repurchasing to replace dividends, buying individual high-dividend stocks is not just as simple as buying dividends.

Overall, however, the excessive performance of such an index is obvious to all. Whether it's US stocks, Europe, or Japan, high dividends can outperform the index even better. It fully explains the link between high dividends and high returns.

However, a notable trend is that the higher the dividend, the greater the return loss due to dividend tax. In order to solve the corresponding problem, starting in the 80s of the last century, some companies used repurchases instead of distributing dividends to reduce the tax burden. Currently, leading US stock companies have almost used repurchases as the mainstream way to return shareholders.

Therefore, when considering the company's shareholder returns, it is still necessary to comprehensively consider the total amount of dividends and repurchases.

II. Big Bull Stocks and High Dividends

As can be seen from the above index performance, high dividends have excess returns, but big bull stocks also have high dividends. Some people may think that big bull stocks are famous for growth. Growth and high dividends are often in conflict, so if you want the best return, you can't always pursue dividends too much. High dividend strategies often only seek stability, but this is not the case.

For example, see the best performance of US stocks in the past 10-25 years.

Each company is analyzed, of which,$Celsius Holdings (CELH.US)$Large dividend repurchases have not been initiated, and the dividend rate is negligible.

$NVIDIA (NVDA.US)$It reached a composite dividend rate of 10% in 2015, and since then the dividend rate has been below 4%. Currently, the latest dividend rate is 0.4%. In the long run, Nvidia has a low dividend rate for most of the time.

$Advanced Micro Devices (AMD.US)$There have never been any dividends, and the highest dividend rate in 2022 is only 4%. The rest of the year is too low to read. Typical long-term low dividends.

$Fair Isaac (FICO.US)$The comprehensive dividend rate reached 12% in 2014 and 10% in 2022. The overall dividend ratio is high, but there are also the following years where dividend rates are extremely low.

$Builders FirstSource (BLDR.US)$The operation fluctuated greatly. There was almost no shareholder return in the past, but dividend rates of 12% and 27% were seen in 2021-2022.

$Broadcom (AVGO.US)$The dividend rate continued to be above 5% in profitable years after 2018, and peaked at 11% in 2018. It is considered that the current dividend continues to be high.

$Cadence Design Systems (CDNS.US)$The dividend rate has been less than 3% for a long time, but a major repurchase was made in 2016, achieving a dividend rate of over 14%, and a long-term low dividend rate company.

$Lam Research (LRCX.US)$The dividend rate has not been low for a long time, above 4%, while dividend rates of 11% and 16% were achieved in 2018-2019. This is also considered a long-term medium dividend rate.

Let's take a look at the performance of bullish stocks over a longer period of time.

$Monster Beverage (MNST.US)$Most of the time, the dividend rate was less than 3%. At the time of the 2016 major repurchase plan, the highest dividend rate was 9%. In the long run, dividends are almost never high.

$Apple (AAPL.US)$With the exception of 2021 and 2023, the average dividend rate is around 5-6%, with dividend rates of 9% achieved in 2014 and 2018. However, in earlier years, dividend rate performance was average. However, it is worth noting that most of Apple's huge increase over the past 25 years still occurred during the period when no dividends were paid.

Another extreme example is$Amazon (AMZN.US)$. Since its establishment, Amazon has paid almost no dividends or repurchases, but this has not hindered Amazon's growth of several hundred times.

However, the analysis of the stock dividend rates of more companies over time has not been carried out much.

First, for calculating the long-term returns of high-dividend individual stocks, assuming that the valuation remains unchanged, the final annualized return on shareholding is infinitely close to (1+ comprehensive annualized dividend rate) * (1+ profit cagr) -1.

As can be seen from here, even for stocks with a dividend rate of 10%, profits increase by 5% each year. The final increase is expected to be 15.5% per year. Companies that do not repurchase with dividends have a profit tag of 30% or more, so they can have an annualized return of 30% or more. (Based on the premise that valuations remain the same), this is the reason why stocks such as Burnerex, Amazon, AMD, CDNS, and Monster Drinks have low dividend rates but have become big bulls, because they are growing rapidly.

However, it can also be seen from changes in dividend rates of companies such as Apple and Broadcom. Rapid growth in the early stages does not pay dividends, and subsequent growth rates result in high returns. Over a long period of time, either high growth or high shareholder returns always account for one of them, so stock price performance is also very good, but in general, the increase was even stronger during the growth phase.

Therefore, companies that perform well either keep their dividends low, or have low dividends in the beginning, then grow slowly and then increase their dividends. Anyway, at the beginning of the purchase, the dividends are not very high.

The rise in many cyclical stocks actually satisfies this rule.

But what about buying with high dividends at the beginning? These companies eventually became bullish stocks such as FICO, Nvidia, and LRCX. Among them, Nvidia is similar to LRCX. Nvidia had a high dividend cycle for 15 years. At the time, people looked at Nvidia's 10% dividend rate the same way as a 10% dividend rate for coal and petroleum stocks. But what followed was that AI came, and cyclical stocks became technology growth stocks. The overall growth rate expectations and business model changed. At the same time, they had high dividends and high growth, so the natural increase would not be bad. In summary, it is a pricing error that emphasizes the cycle and ignores growth and stability.

FICO's performance is a bit buggy. The company mainly sells a rating system, and there is not much room for imagination or expansion. Detailed business models have been analyzed in the past.“A 500-fold increase in 36 years: A monopoly position achieved through credit scoring”

What's interesting about this company is that it often has a 10% dividend rate. It can be said that 10 years ago, the market underestimated the company's long-term stability, so the high increase was misjudged by the market valuation, which is not very critical to the dividend rate, but it can also be seen that the company's 2022 dividend rate was 10%, and PE hasn't been lower in 5 years. What happened?

This involves the timing of dividend repurchases. When FICO's market value fell below 10 billion dollars in 2022, even though the company's profit was only 374 million yuan, it borrowed quite a bit of money, and the direct repurchase of 1.1 billion dollars drove the dividend rate for the year to 11%. This repurchase also successfully played a role as a small horse car.

Buybacks at the time of undervaluation led to a huge reduction in share capital and led to significant growth of EPS. And in the past many years, the company has also adopted this strategy of choosing the right time to increase repurchases. Does it recall Berkshire's unbroken, no repurchase principle? Although Berkshire's dividend repurchases are very stingy, there is no need to talk about the long-term increase. This is the effect of choosing a time to buy back to increase shareholder returns.

This is a company-level dividend repurchase technique. With the same dividend repurchases, some companies can just create better stock price performance, and that's where it comes from.

However, in general, there is an objective rule in the current market. Once the company's growth rate is high, the valuation will not be very low; once the market capitalization is high, the dividend rate cannot be high. Therefore, in general, there will be a so-called contradiction between dividend rates and growth. As can be seen from the above company judgments, if we want to pursue absolute high returns, then growth is probably the most critical thing; simply looking at dividend rates is not smart.

Famous interest-receiving stocks such as 3M, Wells Fargo, and British American Tobacco have been paying dividends of around 8-10% for many years, but their stock prices are not good, mainly because profit growth is not good.

It is correct to first determine growth and then compare dividend rates, so the higher the dividend ratio, the higher the expected return. This statement is also partly true.

This is the experience gained from the (1+ composite annualized dividend rate) * (1+ profit cagr) -1 formula. If you're uncertain about growth and only look at dividend rates, you'll make a mistake.

Of course, there is also an opportunity to buy at a high dividend rate. That is, similar to the experience of FICO, Nvidia, and LRCX. The market underestimates performance stability, pays too much attention to the cycle, and is the same as above. The premise remains the same. The higher the dividend rate, the higher the return will still be. Currently, most cyclical stocks can continue to break through and rise at high dividend rates.

3. Current status of high dividends in US stocks

Although the sector with the best gains in US stocks right now, AI doesn't have many high dividends. However, judging from current data, the dividend of US stocks is higher than that of A-shares. It's not difficult to find high dividends from US stocks.

Going back to the previous principle, as long as the growth is the same, the higher the comprehensive annualized dividend rate, the higher the return. Compared with the various high-dividend companies currently being sought after for A-shares, it is found that US stocks are actually quite cheap.

Starting from energy companies, Shell's composite dividend ratio is 10% +, ExxonMobil is 7% +, and Chevron is 9% +, but it does have a 1-2 point advantage over China's oil giants. Many non-US resource companies have higher dividends. For example, Vale is 15%. In a sense, if everyone's growth rate is similar, then US stock resources stocks do have a valuation advantage over A-shares, unless Chinese resource companies have better growth potential than companies in other countries.

Perhaps because of the current difference in interest rates, you might think that a higher valuation of A-shares is appropriate, but don't forget that undervaluation due to high interest rates actually means an increase in future valuations due to lower interest rates. Conversely, high valuations due to low interest rates also mean that it is difficult for valuations to have room for further improvement.

Meanwhile, the banking sector of US stocks also has 10% + dividends. Currently, Hong Kong stocks aren't that cheap, let alone A-shares, but when it comes to sector growth, A-share banks are also quite ahead this year.

Regarding bank stocks in US stocks, there is basically a 10% dividend with risk and no increase in performance, and the dividend rate of major banks that are growing steadily is around 4-5%.

Other utility stocks in US stocks, including operators and military companies, have a 7-9% comprehensive dividend rate, which is also much cheaper than A-shares and Hong Kong stocks. However, in the long run, these companies have performed quite well and can barely keep up with the index.

Finally, there are US stock manufacturing companies. Basically, dividend rates that can grow well are between 2-4%. 8-10% dividend ratios that don't grow well are very common. This is true for many industrial machinery and medical companies, such as Novartis Pharmaceuticals, Dow, and John Deere.

This can also be said to be a major part of the consciousness of US stocks. It is also the part that has the biggest gap with A-shares. Many A-share manufacturing companies have stagnated in growth but have never pulled back to a reasonable dividend rate pricing range. On the other hand, the companies concerned will not choose to stagnate growth and increase dividend repurchases. The manufacturing industry is the type of company that accounts for the largest share of the Chinese market. This is the key part of opening up the gains in A-shares and US stocks.

IV. Conclusion

Judging from the experience of US stocks, finding excess income presupposes determining growth, but there is no contradiction between growth and dividend rate. If growth is the same, naturally, companies with higher dividend rates have more room for growth. In the investment strategy of buying high-dividend individual stocks, the probability of long-term high growth is not very high. Many bullish stocks started to rise sharply, and the dividend rate was not high. However, there are also counterexamples. Companies with high dividends are misjudged for cyclicality, growth, and stability. But once high-dividend companies have fixed their misjudgments, then there is no such logic.

Editor/Somer