Dividend yield determines investment returns. How to select high-dividend-yield stocks?

Why Are Investors Paying Increasing Attention to High-Dividend Stocks?

In recent years, market volatility has intensified, prompting many investors to shift from chasing high-growth stocks to investing in listed companies with stable dividends. These stocks are popular mainly because they can provide relatively certain cash returns, helping to balance market risks. When economic prospects are uncertain, this regular dividend-paying feature becomes especially attractive.

For novice investors entering the stock market, how to select suitable investment targets based on dividend yield is often a challenge. This article summarizes basic knowledge and practical methods to help you make smarter decisions in a complex financial environment.

What Is the Essence of Dividend Yield?

Dividend Yield is an important financial indicator used to measure how much a company pays in dividends annually relative to its stock price. It combines two factors: the dividend income per share and the current stock market price. Because it considers the stock price, dividend yield can more accurately reflect the return level per unit of investment.

Different industries and companies at various stages have vastly different attitudes toward dividend policies. Growing companies tend to reinvest profits into expanding their business rather than paying dividends; mature and stable companies are more willing to distribute dividends, often with year-over-year growth.

From an industry perspective, Real Estate Investment Trusts (REITs), utilities, consumer staples, and energy-related companies typically offer higher dividend yields.

The Calculation Logic of Dividend Yield

The formula is as follows:

Dividend Yield = Annual Dividends ÷ Stock Price

For example, if a company’s stock price is $10 and it pays $1 in dividends annually, the dividend yield is 10%.

If a company’s dividend yield increases year by year, it may seem like a positive signal indicating good management and increasing dividends. However, it’s important to note that rising dividend yield could also result from a falling stock price, which requires case-by-case analysis to determine whether it’s a positive or negative indicator.

When calculating dividend yield, the frequency of dividends must be considered. Most companies pay quarterly dividends, but some pay monthly or annually. For example, Realty Income adopts a monthly dividend payment mode, while McDonald’s pays quarterly dividends. Due to different frequencies, directly comparing their dividend amounts can be misleading.

The correct approach is to convert all to an annualized figure. Suppose Realty Income pays $0.25 per month (total $3.05 annually), and McDonald’s pays $1.52 quarterly (total $6.08 annually). Although McDonald’s has a higher annual dividend amount, after considering the stock price, Realty Income’s dividend yield is actually twice as high as McDonald’s.

The Core Appeal of High-Dividend Investing

Stable Cash Flow

The biggest advantage of high-dividend stocks is the stability of income. Even if the stock price fluctuates, investors can receive relatively fixed dividends each quarter. This cash flow is especially important for those seeking regular income, with some even relying on dividend income for daily expenses.

A Barometer of Company Financial Health

Companies able to maintain high dividends generally have solid financial fundamentals. Dividends come from profits; loss-making companies cannot pay dividends. If a company can sustain stable high dividends over the long term, it indicates strong profitability, good financial health, and relatively stable stock prices.

Potential for Value Appreciation via Compound Effect

Investors can reinvest dividends to buy more shares, generating a compounding effect. For example: investing $10,000 to buy 500 shares at $20 each, with a 5% dividend rate, yields $500 in the first year. Reinvesting this dividend to buy more shares increases the holding to 526 shares, with a total asset value of $10,520.

Continuing this process, the initial $10,000 could grow to $12,240 by the fifth year (a 22.4% increase), assuming stock prices remain unchanged. If stock prices rise, actual returns could be even more impressive.

Common Misconceptions When Choosing High-Dividend Stocks

High Dividend Yield Does Not Equal a Good Opportunity

The reasons behind a high dividend yield require in-depth analysis. It may result from increased dividends (a positive sign) or from a significant drop in stock price (which could indicate risk).

For example, ExxonMobil’s dividend yield dropped from 6.1% in 2020 to 3.3% in 2022. This is not due to a reduction in dividends, but because the stock price surged significantly, with dividends steadily increasing (from $3.48 to $3.65 over three years). In this case, the decreasing yield is actually a positive signal.

Pay Attention to Multiple Metrics

Besides dividend yield, investors should also observe payout ratio, which is the proportion of net profit paid out as dividends. If the payout ratio continues to rise without profit growth, it may indicate the company is overextending to maintain dividends, which is risky.

In 2020, ExxonMobil experienced losses but still paid dividends. While the dividend amount seemed normal, analyzing the payout ratio reveals potential issues. Investors need to consider multiple aspects such as balance sheets, income statements, and dividend growth history to assess whether high dividends have long-term investment value.

What Is a Reasonable Dividend Yield? How to Screen for High-Dividend Stocks?

Generally, a dividend yield exceeding 4% is considered quite good. However, this standard is not absolute and should be evaluated in conjunction with the company’s quality and industry characteristics.

To find stocks meeting these criteria, you can use stock screening tools. Most investment platforms offer screening functions where you can set parameters like dividend yield range, market capitalization, dividend growth rate, etc., and sort by dividend yield to identify target stocks.

Typical steps: access the screening menu → set screening criteria (including target dividend yield, market cap, dividend growth) → sort by dividend yield → review stocks with the highest yields.

Overview of High-Dividend Stocks in Recent Years

Below are representative stocks with dividend yields over 4% from 2020 to 2023, covering REITs, energy, consumer, and communication sectors:

2023 Dividend Yield >4% Representative Stocks

2022 Dividend Yield >4% Representative Stocks

High-Dividend Stocks in 2021 and 2020

In the high-dividend stocks of the past two years, many notable cases appeared. In 2021, AT&T’s dividend yield reached 12.1%, and MPLX LP maintained around 10.6%. In 2020, Antero Midstream achieved a dividend yield of 19.8%. However, such extremely high figures often come with higher risks and require cautious evaluation.

Characteristics of Cash Dividends

Cash dividends are the most common form of dividend yield, referring to companies distributing dividends in cash, divided by the stock price. Unlike profit from stock price appreciation, cash dividends are relatively stable. Although the dividend yield fluctuates with stock price changes, the amount of cash received per share usually remains steady. This stability is a key reason why many conservative investors favor such stocks.

Summary

Choosing high-dividend stocks requires more than just looking at the dividend yield number on the surface. The question of what constitutes a reasonable dividend yield has no absolute answer; it must be evaluated in conjunction with the company’s growth prospects, financial health, and dividend sustainability. Generally, a dividend yield over 4% is considered excellent, but one must also watch out for traps caused by falling stock prices artificially inflating the yield. Using scientific screening tools, conducting in-depth fundamental analysis, and monitoring dividend payout trends are essential to identify truly valuable high-dividend stocks for long-term investment.