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:
- Find shares that paid well above 6% dividends in 2021
- 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.
- Does the company pay >6% of dividends (before tax) based on the current share price and dividends of the current year?
- Was the share price development in the last 4-5 years positive or at least neutral (+/-10%)?
- 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)?
- Has the annual EBITDA growth rate in the past 5 years at least 4 times been positive?
- 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:
- Altria (Tobacco, US)
- Anglo American (Mining, UK)
- Arbor Reality Trust (Real Estate, US)
- BHP Billiton (Mining, UK)
- British American Tobacco (Tobacco, UK)
- CEMIG (Electricity, Brazil)
- China Shenhua Energy (Energy, China)
- Enagas (Energy, Spain)
- Endesa (Energy, Spain)
- Evraz (Mining, UK)
- Flow Traders (Trading, Netherlands)
- Freenet (Internet, Germany)
- Harvey Norman (Retail, New Zealand)
- HKT Trust (Telecom., Hongkong)
- Imperial Trust (Tobacco, UK)
- Mobile Telesystems (Telecom., Russia)
- ONEOK (Energy, US)
- Rio Tinto (Mining, UK)
- 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.