How to identify the best high-dividend investments

In November 2021, when it became clear that interest rates will increase soon in order to fight the current high inflation, a huge shift from technology and high growth shares towards more secure, large, and high-dividend-paying shares started. Over Christmas, I took a deeper look into companies with very high dividend ratios with the goal to find interesting companies in that area.

Why looking at so many different companies? Why not just buying a dividend ETF?

In the beginning, I indeed considered buying just a suitable dividend ETF, which pays-out high amounts. After an analysis of available ETFs via my broker, I found the following two particularly interesting:

1. Emerging Markets (EM) Dividend USD

  • Based on Emerging Markets (EM) Dividend USD (based on iShares V plc – iShares EM Dividend UCITS ETF USD)
  • Dividend payout of >6.5%
  • No negative long-term chart
  • TER of 0.65%

2. MSCI Europe Quality Dividend

  • Based on MSCI Europe High Dividend Yield 4% Issuer Capped Index
  • Dividend payout of >4.4%
  • No negative long-term chart
  • TER of 0.28%

However, especially the first one comes with a relatively high cost, which is shown as the Total Expense Ratio (TER). Generally, a TER up to as much as 0.4% is accepted to be fine, however, even 0.28% can become a high amount of money if you plan to hold the ETF for decades.

Approach to identifying the best individual company shares

As alternative, I decided to do my own analysis and tried to find a good set of companies that I could buy. The goal is not to find the one best company, but a list of at least ten companies or more so that I can mitigate the risk of one being a bad choice. Hence, my goals were to:

  1. Find shares that paid well above 6% dividends in 2021
  2. Find about 10 shares that pass my quality checks

Which crucial checks to perform to identify a good share investment

Due to the large amount of companies that I considered manually, I decided for an easy and quick approach to narrow-down potential investments. In particular, I looked at the following questions in the order as shown below. Everytime a criteria was not met by a company, I dropped it from my list.

  1. Does the company pay >6% of dividends (before tax) based on the current share price and dividends of the current year?
  2. Was the share price development in the last 4-5 years positive or at least neutral (+/-10%)?
  3. Accumulating all dividends from 2019 – 2021, dividing by three, and putting in relation to the current share price – did the company pay on average yearly >6% of dividends (before tax)?
  4. Has the annual EBITDA growth rate in the past 5 years at least 4 times been positive?
  5. Will the total dividend payout be smaller than the profits of the companies in the years 2021 – 2023? (future estimations of dividends and profits taken from Consorsbank)

Which companies might be a good investment? Which companies did I consider?

First of all, my research has not been completely exhaustive and it is perfectly possible that I missed out a few very good companies. However, I tried to explore as many new companies as possible to broaden my horizen and to not only consider the “typical” ones.

How did I do that? I basically went through my initally considered ETFs from above, as well as through a few others, looking at the individual companies. I also looked at a few “typical” investments of high-dividend investors and searched for more ideas on the Internet. The following list (alphabetically ordered) resulted from that research as first long-list to be further analyzed:

  1. Altria (Tobacco, US)
  2. Anglo American (Mining, UK)
  3. Arbor Reality Trust (Real Estate, US)
  4. BHP Billiton (Mining, UK)
  5. British American Tobacco (Tobacco, UK)
  6. CEMIG (Electricity, Brazil)
  7. China Shenhua Energy (Energy, China)
  8. Enagas (Energy, Spain)
  9. Endesa (Energy, Spain)
  10. Evraz (Mining, UK)
  11. Flow Traders (Trading, Netherlands)
  12. Freenet (Internet, Germany)
  13. Harvey Norman (Retail, New Zealand)
  14. HKT Trust (Telecom., Hongkong)
  15. Imperial Trust (Tobacco, UK)
  16. Mobile Telesystems (Telecom., Russia)
  17. ONEOK (Energy, US)
  18. Rio Tinto (Mining, UK)
  19. Yara International (Agriculture, Norway)

Taking the average across those 19 companies, they paid an average of 8.88% dividends in 2021! (criteria 1 from above) Even considering the payments over the last three years (criteria 3), the average dividends payment is 7.65%!

In my next post, I will present the most interesting findings from my analysis as well as my conclusions from it.