Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 524

Is there still value in high dividend-yielding companies?

Investment returns can be roughly broken down into the sum of two components: growth and yield. When a business generates cash flow, it can be reinvested to produce future growth, paid out to shareholders, used to pay down debt, or some combination of the three.

The growth component can be extremely valuable if management allocates capital sensibly on behalf of shareholders. The downside is that future growth is inherently unpredictable and therefore difficult to value. The yield component, the hard cash in hand today, is more predictable and easier to measure relative to the price you pay for it (e.g. dividend or free cash flow yield). The disadvantage with yield is that shareholders need to be able to reinvest the cash wisely.

In ‘normal’ market environments, we tend to find mispriced investments across the spectrum—from businesses that reinvest close to 100% of their cash flow in an effort to grow, to those that have lower growth opportunities and therefore release more profits. Yet the current environment is somewhat unusual in that we have found more opportunities toward companies in the latter camp—those with high yields on excess cash, or more simply higher dividend yields.

High yield stocks appear to be attractive

We do not control the investment environment; we are price takers. We seek to own mispriced equities, and we are not dogmatic in our search for them. Terms like ‘growth’, ‘value’, or ‘quality’ are all just different fundamental characteristics that can be more or less attractive at a given price.

That said, we do find today’s environment to be both fruitful for stock selection and perhaps even comforting in the sense that it comes with a relatively high degree of certainty, to the extent such a thing exists in investing.

Firstly, if a company is able to pay a high dividend that is well-covered by its free cash flow generation and able to keep pace with inflation over the long term, an investor doesn’t need to do much forecasting in order to earn an attractive return.

Shares that offer well-covered 5-7% real dividend yields are not typically common, but we have found more than a few of them in today’s environment. To put this in perspective, international equities have returned just over 6% per annum (in US dollars) since 1990, a return stream that has been accompanied by considerably greater risk and uncertainty.

Secondly, there has historically been a strong tailwind behind shares of businesses with above average dividend yields. If you invested $100 in an equal-weighted basket of international stocks in 1990, you’d have about $700 today. But if you only invested in the half of shares with the highest dividend yields, you’d have about $1,800! A bird in the hand has been someway better than two in the bush, and this has been especially true following periods in which ‘yield’ was on sale, as is the case today.

Emerging markets offer selected opportunities

Whilst we have found yield opportunities across the globe, a few of our emerging market (EM) equities are worthy of discussion. Somewhat akin to the ‘AI’ moniker today, ‘BRIC’ economies (Brazil, Russia, India, China) were the darlings of the 2000s. The narrative turned out to be absolutely correct—economic growth rates were indeed impressive—but the rampant influx of capital from growth-hungry investors pushed BRIC valuations to extremes and set the stage for disappointing longer-term returns. Exciting narratives and satisfying investment results tend not to be happy bedfellows. Growth is fabulous only if you pay the right price for it.

Fast forward to today, and we would argue that the longer-term growth story in much of the developing world has not meaningfully changed. Countries like Indonesia have growing populations, growing productivity, and plenty of room for further development over the next few decades. Yet investor sentiment and capital flows have changed substantially. EM equities are now characterised by depressed valuation multiples and little interest from the large pools of global investment capital.

Investor apathy has a profound impact not only on the valuation multiples applied to EM equities, but also on the fundamentals of the businesses themselves. When valuations are low, it can be a signal to management teams that it’s time to pay ample excess cash back to shareholders rather than reinvest aggressively in future growth. In EMs, one can still find a constructive blend of low valuations, high cash yields, and modest amounts of capital investing behind potentially solid and enduring growth opportunities. This is often a great setup for robust future investment returns.

A good illustration is Jardine Matheson (JM), a Hong Kong-based industrial conglomerate with holdings across Asia in property, autos, retail, finance, construction, restaurants, transport, hotels, and industrial equipment. Given JM’s footprint in the region, the business carries substantial and diversified exposure to the continued growth and development of emerging Asia.

Jardine Matheson Holdings Ltd

Source: Morningstar.com, as of Aug 18, 2023.

Like many Asian businesses, the company has struggled to grow over the last decade in part due to the hangover after the 2000s boom. Yet given the quality of its underlying assets, JM has still managed to grow dividends per share at a mid-single digit rate. We believe this growth rate should at least be maintained, but most likely move higher going forward, assuming prudent capital allocation by management and continued recovery in some of its underlying markets. In addition to this growth, investors are paid a 4% dividend yield, and the shares trade at an approximately 40% discount to the underlying market value of its assets. The result is a solid and reasonable base case return with potential upside.

In South Korea, Samsung Fire & Marine Insurance (SF&M) provides another example of the possible value on offer in EMs. The company is South Korea’s leading auto, property and casualty, and health insurer, but it owns a stake in Samsung Electronics that accounts for a large part of its market value. To put this in perspective, this valuation implies that its core insurance business is worth roughly the same as its #2 competitor, DB Insurance (DB), despite SF&M’s superior profitability, higher underwriting quality, and more conservative accounting practices. Furthermore, SF&M’s dividend has grown fourfold over the last decade, and now yields around 6%. Like most insurers globally, SF&M is starting to benefit from both a ‘harder’ market (i.e. the ability to charge higher premiums) and from higher reinvestment income as bond yields rise.

Samsung Fire & Marine Insurance Co Ltd

Source: Morningstar.com, as of Aug 21, 2023.

Besides generous dividend yields, a common theme uniting the examples discussed above might simply be that these companies are heavily out of favour. You’re unlikely to hear much about Asian industrial conglomerates or South Korean insurance policies at a cocktail party. For value-oriented investors, that’s usually an exciting setup.

 

Shane Woldendorp, Investment Specialist, Orbis Investments, a sponsor of Firstlinks. This article contains general information at a point in time and not personal financial or investment advice. It should not be used as a guide to invest or trade and does not take into account the specific investment objectives or financial situation of any particular person. The Orbis Funds may take a different view depending on facts and circumstances. For more articles and papers from Orbis, please click here.

 

RELATED ARTICLES

Emerging market equities are ripe with opportunity

Preparing for next decade's market winners

Two companies with clear competitive advantages.

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Latest Updates

Investment strategies

Finding income in an income-starved world

With term deposit rates falling, bonds holding up but with risks attached, and stocks yielding comparatively paltry sums, finding decent income is becoming harder. Here’s a guide to the best places to hunt for yield.

Economy

Fearful politicians put finances at risk

A tearful Treasury chief, a backbench rebellion, and crashing bonds. What just happened in the UK and why could Australia’s NDIS be headed for the same brutal fiscal reality?

Shares

Investing at market peaks: The surprising truth

Many investors are hesitant to buy into a market that feels like it’s already climbed too far, too fast. But what does nearly a century of market history suggest about investing at peaks?

Shares

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Investment strategies

Will stablecoins change the way we pay for things?

Stablecoins have been hyped as a gamechanger for the payments industry. But while they could find success in certain niches, a broader upheaval of Visa and Mastercard's payments dominance looks unlikely.

Infrastructure

An investing theme you can bet on for the next 30 years

Investors view infrastructure as a defensive asset class rather than one with compelling growth prospects. These five tailwinds for demand over the coming decades suggest that such a stance could be mistaken.

Investment strategies

A letter to my younger self: investing through today's chaos

We are trading through one of history's most confounding market environments. One day, financial headlines warn of doomsday scenarios. The next, they celebrate a new golden age. How can investors keep a clear head?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.