High-Dividend-Yield Stock Investment Strategy—A Brief Analysis of Its Core Principles

— The high-dividend-yield stock investment strategy is, in essence, an extension of traditional value investing. The core principle of traditional value investing is to purchase stocks at prices below their intrinsic value and sell them once that intrinsic value is realized. Intrinsic value can be estimated in two primary ways: 1. Liquidation Value Approach: This assumes the company goes bankrupt and liquidates its assets; the resulting proceeds represent its liquidation value. (Associated with Benjamin Graham.) 2. Discounted Cash Flow (DCF) Approach: This calculates the present value of all future cash flows a company is expected to generate over its entire lifecycle. (Associated with Warren Buffett.) In today’s Chinese market, however, both methods hold largely theoretical or estimation-based significance, with limited practical applicability due to substantial uncertainty. By contrast, investing in high-dividend-yield stocks is comparatively straightforward to implement and relatively stable—especially prevalent in China’s Hong Kong stock market. For cyclical stocks, high-tech stocks, or those touted as high-growth—where strong performance may often be little more than market hype—investment difficulty tends to be significantly higher. Reviewing companies with consistently high dividend yields over the past three years reveals several common characteristics among such firms: large market capitalization, low growth rates, operation in traditional industries, weak growth expectations, and low stock price volatility. Thus, the high-dividend-yield investment strategy closely resembles Graham’s ‘cigar-butt’ approach—seeking undervalued companies trading below book value. Yet such dividend-paying firms possess one key advantage over deeply discounted (‘broken-net’) stocks: while many broken-net stocks operate at or near losses, dividend payers demonstrate fundamentally sound, ongoing operations. — Relationship between Dividend Yield and Dividend Payout Ratio (also known as Dividend Distribution Ratio or Payout Ratio) Dividend Payout Ratio = Total Annual Dividends / Net Income For a well-established listed company, dividend payout behavior generally follows certain patterns: • Early-stage companies typically maintain low payout ratios—usually under 20% of annual net income; • Growth-oriented companies usually distribute 20%–40%; • Steadily expanding firms commonly pay out 40%–60%; • Mature, slowly growing companies often exceed 60%. From this perspective, a payout ratio around 40% is often considered optimal—it signals the company has likely entered, or is entering, a stable growth phase and retains room to further increase payouts. While this holds theoretically, industry-specific variations remain significant. For example, banks and real estate firms—including China’s ‘Big Four’ state-owned banks—currently offer dividend yields around 4.5% (subject to recent fluctuations), with annual earnings growth generally below 5% and payout ratios hovering between 30% and 40%. These institutions rarely raise dividend yields, as they remain capital-constrained. Consequently, markets assign them low P/E and P/B multiples—partly explaining why some sectors appear profoundly undervalued. Let us revisit the dividend yield formula: Dividend Yield = Dividend per Share / Stock Price. There are two ways to increase dividend yield: 1. Keep dividends constant while lowering the stock price—i.e., falling share prices automatically boost yield; 2. Hold the stock price steady while increasing total dividends—driven either by: • An increase in the dividend payout ratio (e.g., due to policy shifts or maturity-driven strategic decisions—often short-term or one-off events); or • Accelerated earnings growth leading to greater profit margins. Based on this formula and analysis, investing in high-dividend-yield stocks fundamentally means capturing three sources of return—valuation recovery, intrinsic value realization, and corporate growth—all within a margin of safety.

Buying stocks and ignoring price fluctuations—relying solely on dividends for returns: How feasible is this approach?

Feasibility depends heavily on the investment market and the specific securities chosen. In the U.S. market, numerous suitable candidates exist for a ‘buy-and-hold-for-dividends’ strategy. Examples include: • Long-standing high-dividend stocks, such as AT&T; • High-dividend REITs, such as AGNC; • Dividend-paying ETFs with solid track records, such as VNQ. However, investors must still monitor the operational health of these dividend-paying stocks, REITs, or ETFs. Should their underlying business conditions deteriorate—leading to reduced dividend capacity—their stock prices will likely fall sharply, rendering the ‘ignore price movements’ premise invalid. As long as operations remain stable, price fluctuations can indeed be disregarded; but if fundamentals weaken, portfolio adjustments become necessary.

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