How to find high-dividend US stocks?

There are two ways to potentially make money by investing in a company: earning capital gains from rising stock prices or receiving real cash through company dividends. We can't control the rise and fall of the share prices, but we can choose companies with high dividend payments.

Therefore, to a certain extent, high-dividend stocks are the choice of many conservative investors. So, what indicators should be used to pick high-dividend stocks? Let's take a look.

From the perspective of business operation, let's look at the basic logic behind stable high dividends to find out the stocks that have the potential for long-term distribution of high dividends. 

We first consider the following perspectives, including:

1. Revenue size. Companies with large revenue sizes are prone to competitive advantages such as the scale effect.

2. Return on equity (ROE). The higher the ROE, the business model may have a higher entry barrier and better profitability.

3. Cash flow from operating activities/revenue. Consider the difficulty of product payback.

4. Dividend payout ratio. This is the subjective will of a company to distribute profits.

From the above four potential perspectives, we take the data of stocks of the three major indexes as the sample to verify whether these factors significantly impact the dividend yield. Let's take a look.

1. Company revenue size

Top companies have more resources to compete in the market and build their industry barriers. Operating with the advantage of scale, they may have more substantial overall competitive edges, granting them more opportunities to obtain long-term solid returns.

Based on revenue, we can categorize them into three groups: (1) below USD 2 billion; (2) USD 2-10 billion; (3) USD 10 billion or more. Their dividend yields are as follows.

Source: Wind Information; chart plotted by Moomoo learn

We can see from the chart that companies with more enormous revenues also have relatively higher overall dividend yield levels in 2019-2021. In other words, we can tell that company revenue size may have a rather significant impact on the dividend yield level.

2. Return on equity

Return on equity is also known as the return on net assets, measuring how efficiently a company manages its income. Return on equity(ROE) = Net Profit Margin x Asset Turnover Ratio x Financial Leverage.

Therefore, a company with a high ROE will generally have one or more of the following capabilities:

(1) Products or services with competitive barriers, resulting in high net profit margins.

(2) High operational efficiency, resulting in a high total asset turnover ratio.

(3) High upstream and downstream bargaining power that brings high financial leverage. For example, account receivables for upstream subsidiaries or prepayments to downstream companies lead to high debt levels.

We also divide the companies into three groups based on their ROE levels: (1) below 10%, (2) 10-20%, and (3) above 20%, and the results are as follows.

Source: Wind Information; chart plotted by Moomoo learn

We can see from the chart that companies with higher ROE usually have higher levels of dividend yields. For companies with over 10% ROE, the higher the ROE, the higher the dividend yield. 2021 was an exception when the dividend yield was a bit lower for companies with ROE above 20%.

This also suggests that US companies with higher ROEs usually have a solid competitive barrier in one aspect and thus have the strength to pay more dividends.

3. Cash inflow from operating activities/revenue income

Cash inflow from operating activities/operating income is an indicator that measures the amount of cash a company gets from regular activities. The greater the indicator, the stronger the company's bargaining power to the downstream (could be distributors or other channels), the lower the accounts receivable, and the faster the cash return. Conversely, if the company has a small indicator, it could suffer from capital deficiency due to downstream payments, possibly causing difficulties in the long-term dividend distribution.

We categorize the companies into three groups based on their cash inflow from operating activities/operating revenue: (1) less than 30%, (2) 30-60%, and (3) more than 60%, and the results are as follows.

Source: Wind Information; chart plotted by Moomoo learn

We can see that companies with cash inflow from operating activities/operating revenue below 30% have significantly lower dividend yields. However, the difference between the two groups of companies with cash inflow from operating activities/operating income of 30%-60% and 60% or more is less pronounced.

This also suggests that cash flow impacts a US company's dividend yield, but the impact is less significant. It may be because, for companies with more mature business models, their dividend distributions are also related to expectations of following operating conditions. The current percentage of cash received from the sale of goods may have less impact on long-term expectations.

4. Dividend payout ratio

The dividend payout ratio is the proportion of net income paid out to shareholders via dividends. If a company has a high dividend payout ratio, it indicates that the company is willing to distribute its profits to shareholders.

We categorized the companies into three groups based on dividend payout ratio: (1) 0-35%, (2) 35-70%, and (3) more than 70%, and the results are as follows.

Source: Wind Information; chart plotted by Moomoo learn

We can see that US companies with higher dividend payout ratios also have higher dividend yield levels. Companies willing to distribute their profits to minority shareholders focus more on shareholders' rights and have a higher probability of paying dividends in the future.

Combining the analysis of the above four sets of data, we can see that the most significant impact on dividend yield is the level of dividend payout ratio, while ROE and revenue size also have a greater impact on dividend yield, meaning that long-term high dividends may come from companies with higher profitability due to good competitive barriers, larger revenue size and willingness to distribute money to shareholders. These companies are more likely to be able to pay higher dividends consistently over time. These three factors are also what we may need to focus on when picking high-dividend US stocks.

Lastly, every stock faces price risks, and high-dividend stocks are no exception. Stocks with the highest dividend yields could be penny stocks or other highly volatile stocks. Their stock price can fluctuate wildly, making them the ones most prone to losses.

Therefore, short-term gains should not be the only focus. The sustainability of the high dividend rate is crucial as well. Other than dividend rate, other factors that may affect the stock price should also be taken into consideration in stock selection.