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In the realm of investment, the allure of high-dividend assets has captivated many investors, especially those seeking stable income streamsHowever, not every asset boasting high dividends is worthy of investment; rather, genuine high-dividend companies are exceedingly rareThese companies exhibit consistent profitability, stable cash flows, and sustainable dividend payout ratiosIn fact, only a handful of firms truly fit this mold, with value stocks being the closest alternatives.

Over the past couple of years, Chinese A-shares focusing on high-dividend yields have garnered significant attention from investorsFor instance, coal stocks reached record highs in 2023, followed by banking, hydropower, and nuclear power stocks in 2024, which continued the trend by also hitting unprecedented levels.

So, what exactly constitutes a true high-dividend asset? Investors must remain vigilant to avoid falling for the 'fake' high-dividend assets that are prevalent in the market today.

To understand high dividends, we first need to clarify what dividend yield is

Simply put, dividend yield represents the ratio of annual dividends paid to the market value of a stockThis can be expressed mathematically as: Dividend Yield = Annual Dividend per Share / Share Price.

A solid grasp of dividend yield is crucial for making informed investment decisionsConsider a scenario where an investor uses 1 million yuan to purchase a stock that pays a stable annual dividend of 100,000 yuanThis gives the stock a dividend yield of 10%. After receiving the dividend, the investor pockets the 100,000 yuan (ignoring taxes), while the number of shares held remains unchanged.

However, one must remember that dividends come with the notion of ex-dividend datesSticking with the previous example, once the dividend is distributed, the market value of the investment would drop from 1 million yuan to 900,000 yuan (1 million yuan - 100,000 yuan).

Skeptics might argue, what’s the point of receiving dividends if they are countered by a drop in the stock price?

Nevertheless, receiving dividends serves two important purposes: first, it provides tangible earnings; second, if a company maintains steady profits, the stock price is likely to rebound, thereby filling the gap left by the dividend distribution

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If the stock price does not rebound and maintains its dividend payout ratio, the yield will increase—from 10% to 11% (100,000 yuan / 900,000 yuan). After nine years, this yield could theoretically escalate to 100% if reinvested wiselyTherefore, despite the inherent fluctuations in share price due to dividend payouts, dividends remain fundamentally significant.

The correlation between dividend yield and net profit cannot be overlookedTo break it down: Dividend Yield = Total Annual Dividend / Market Value = Net Profit x Payout Ratio / Market ValueConsequently, for a company to uphold high dividends, it must ensure stable earnings, consistent dividend payouts, and avoid excessive increases in share price.

Even with stable net profits, a fluctuating dividend payout ratio can render dividends inconsistent

Some entities opt for special dividends in a given year, resulting in a payout ratio exceeding 100%. This situation is often unsustainable and should raise red flags for investors.

An essential characteristic for high-dividend assets is their dividend-paying capability.

A common misconception among investors is to simply regard retained earnings on the balance sheet as a marker of a company’s dividend-payment capacityWhile large retained earnings indicate past profits, they don’t account for whether that money is recuperated in cash or reinvested for growth, both of which can significantly affect the firm’s ability to distribute dividends.

Take Company A, for instance; as of the third quarter of 2024, its retained earnings amounted to a staggering 55.5 billion yuan, constituting 66% of its net assets

Yet, despite accruing a net profit of 16.2 billion yuan from 2021 to Q3 2024, the company has issued zero cash dividends since 2021.

Why, you might ask? The answer lies in the fact that as of Q3 2024, the company’s liquid assets stood at only 13.3 billion yuan, merely 4% of its total assetsAdditionally, stock inventories made up 36% of total assets, with investment properties accounting for another 35%. This implies that while the company may appear profitable, it has primarily channeled its earnings into inventory and real estate investments instead of dividends.

Consequently, substantial retained earnings do not necessarily equate to a strong dividend-paying capacity; a lack thereof signifies an absence of capability to pay dividends as well, as dividends fundamentally hinge on profits.

True dividend ability is not encapsulated in a singular metric but emerges from a comprehensive analysis of both the balance sheet and cash flow statements.

Stability in earnings is equally important.

As reiterated, a listed company’s ability to distribute dividends relies heavily on its net profits

To sustain a high-dividend status, a company ought to have stable profits and a consistent payout ratio.

Banking assets, which have been popular with investors, often display relatively unchanging profitabilityMaintaining stability in the dividend payout ratio results in correspondingly stable dividend payments.

Looking at Industrial and Commercial Bank of China, for example, while its operating revenue has dipped over the past three years, its net profit has shown consistent growth—rising from 274.5 billion yuan in 2015 to 361.4 billion yuan in 2023. This positions it as an asset of stable profitabilityBarring exceptional circumstances, the bank is expected to continue showing stable net profits in the foreseeable future.

Between 2015 and 2023, the bank maintained a steady dividend payout ratio of 30%. As long as this ratio is upheld, the cash dividends distributed by the bank are set to increase consistently.

In contrast, cyclical assets, which exhibit profit volatility, do not qualify as high-dividend resources, such as coal and oil companies.

Company B is a case in point

Recently, the company has benefitted from soaring product prices, with net profits soaring from 57.2 billion yuan in 2019 to 140.3 billion yuan in 2023. Nevertheless, the cash dividends recorded were significant for 2022 and 2023—1.091 billion yuan and 543 billion yuan, respectivelyA sudden downturn in product prices could drastically decrease profits and subsequently slash dividend payouts to as low as 50 billion yuan, drastically impacting the dividend yield.

Thus, the foundation for high-dividend assets unequivocally lies in stable profitability.

Furthermore, high-quality earnings are key.

Assessing earnings quality generally pertains to the level of operating cash flowA stable and positive net operating cash flow reflects a company's capability to generate cash, serving as a critical indicator of its ability to pay dividends

For a company to qualify as a high-dividend stock, it must possess consistent operating cash flows.

Industries such as banking, hydropower, and nuclear power consistently report robust operating cash flows, which underpins their capacity to distribute dividends.

Consider Changjiang Power Company, whose net operating cash flows for 2020 up until Q3 2024 were 41 billion yuan, 35.7 billion yuan, 30.9 billion yuan, 64.7 billion yuan, and 47.6 billion yuan, consistently surpassing annual net profits.

High-quality earnings not only serve as the foundation for dividends but also drive growth for numerous companiesTherefore, firms presenting high-quality earnings are invariably deserving of investment consideration.

The quality of the balance sheet plays a crucial role as well.

The quality of a balance sheet is largely determined by its overall condition, where the key indicator is the level of interest-bearing liabilities; ideally, a company should have minimal or no interest-bearing debts

Interest-bearing debts, which include loans and bonds, are obligations that must be repaid, regardless of current circumstances.

Of course, the quality of the balance sheet is closely associated with the company's business modelFor instance, banks operate with high leverage; their interest-bearing debts are typically large in scaleIn contrast, the hydropower industry necessitates extensive upfront investments, largely financed through loans from banks, which can also result in considerable interest-bearing debts on their balance sheets.

Taking Changjiang Power Company again as an example, by Q3 2024, its cash balance amounted to just 6.559 billion yuan, constituting a mere 1.15% of total assetsSimultaneously, short-term borrowings totalled 71.01 billion yuan, with substantial non-current liabilities and long-term borrowings, leading to interest-bearing debts totaling 303.5 billion yuan—53.31% of its total assets

This situation highlights the significant pressure on the company’s balance sheetFortunately, its strong cash-generating capacity has allowed it to maintain a healthy operating cash flow, far surpassing its net profit.

Now, considering the earlier-mentioned Company A, we can see why it had a total consolidated net profit of 16.2 billion yuan over three years but has paid no cash dividendsFirst and foremost, profitability was inconsistentIn 2021, the company posted an impressive net profit of 10.245 billion yuan; however, this plummeted to 727 million yuan in 2022, with an even poorer figure of 307 million yuan projected for 2023.

Despite a well-performing operating cash flow, with net flows attractive in 2021 to Q3 2024, company assets are predominantly held in inventory and investment properties, tying up cash

Their interest-bearing liabilities remain excessively high; by Q3 2024, total interest-bearing debts were 64.608 billion yuan, with 10.791 billion yuan carried over by the end of 2021. In essence, their cash flow enabled them to repay debts, leaving little to allocate for dividends.

The quality of a company’s balance sheet reflects its financial foundation; a strong foundation inherently supports sustainable dividendsConversely, a weak financial foundation means that profits are primarily allocated for debt repayment, leading to an inevitable inability to distribute dividends.

Overall, companies that demonstrate dividend-paying capabilities do not necessarily want to distribute dividends; however, firms lacking the ability to pay dividends certainly cannot do so

Thus, when evaluating dividend capabilities, investors should meticulously assess the company’s stability in profitability, quality of earnings, and balance sheet integrity.

In summary, only those companies exhibiting stable profits, consistent operating cash flows, and a reliable dividend payout ratio are truly suitable for utilizing dividend yield as a valuation measureSuch true high-dividend assets are indeed few and far between, with value stocks being the closest candidates in this regard.

Currently, the market for high-dividend assets is sizzlingAs the stock prices for numerous companies surge, what constitutes a high dividend may quickly transform into a moderate or even low yieldInvestors must exercise discernment; surging stock prices inherently carry risks, with the most significant risk being the purchase of 'fake' high-dividend assets.