Investing in stocks can often feel like navigating a complex maze filled with opportunities and pitfalls, especially when it comes to strategies surrounding dividendsThe notion of simply purchasing stocks with the highest dividends in a given year and expecting significant returns is a misconception many novice investors fall prey toThe process involves a thorough analysis that goes beyond just the current dividend yieldInvestors must first assess the overall investment value of the stock, ensure the stability and safety of the dividends, and evaluate the company's potential for future dividend growth.

A common mistake made by many investors is to solely chase growth stocks, assuming that these will guarantee them the best returnsHowever, it's essential to recognize that total return from a stock includes both capital appreciation and dividends

For example, suppose a stock priced at $10 appreciates to $11 in one year while also distributing a dividend of $0.50 per shareIn this case, the total return for the investor would be 15% for the yearThis scenario highlights the crucial role dividends play in enhancing total returns from stock investments.

Dividends serve as a critical anchor for long-term returns in investments, with research indicating that approximately 40% of long-term stock market returns are derived from dividendsA noteworthy reference in this realm is David FSwensen's book, "Pioneering Portfolio Management," which cites that over the past two centuries, absolute stock returns have averaged 7.9%, with 5% attributable to dividendsInterestingly, inflation accounted for 1.4%, real dividend growth contributed 0.8%, and the valuation increase only represented 0.6%. This breakdown starkly illustrates that relying solely on capital gains can be misleading.

The adage, "A bird in the hand is worth two in the bush," resonates profoundly in the context of investing

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Capital gains, akin to two birds in the forest, can only be realized by selling the stockMany investors fixate on capital appreciation, neglecting the significance of dividends in their portfoliosFor long-term investors especially, the reliability of dividend payments is paramountI'm not suggesting that every stock in one’s portfolio must pay a dividend; rather, the principle of having that “one bird in the hand”— a reliable dividend stream— provides a solid foundation for returns.

Warren Buffett famously advised investors to be greedy when others are fearful, yet a pressing question arises: most retail and institutional investors lack the kind of constant cash flow that Buffet might wieldWhen the market tumbles, and quality companies present themselves at bargain prices, where will the funds come from to seize these opportunities? Stable and growing dividend streams not only protect against inflation but also facilitate quicker returns on investment

Investors holding concentrated positions can utilize dividends to manage their exposure passively; dividends essentially become cash that can be employed to buy more shares during downturns.

From the investor's perspective, cash dividends represent the gradual realization of investment growth and provide a measure of comfort, protecting against potential unethical behavior from managementStocks that do not distribute dividends may seem enticing during growth phases, but failing to eventually cash in on those investments can lead to disillusionmentThe theoretical ownership of a company is predicated on its management's willingness to share profits with shareholdersWhen management insists on retaining earnings indefinitely without distributing dividends—regardless of the company's growth—the real interest between shareholders and management diverges, often leading to mismanagement.

In contrast, those companies that demonstrate consistent dividend payouts reflect well-established practices of returning value to shareholders

For instance, numerous companies in the American stock market maintain remarkable histories of paying dividends for decades, showcasing resilience through economic downturnsGeneral Mills, the company behind Big G cereals and Betty Crocker snacks, boasts over 110 years of continuous dividend paymentsPepsiCo, which initiated dividends in 1952, has managed to enhance its dividends annually for 40 consecutive years, a testament to a robust commitment to shareholder value.

Finding solid stocks with secure dividends that also exhibit year-on-year growth is not merely an ideal; it is a crucial strategyWhen adopting a high-dividend strategy, simply buying the highest-yielding stocks will not sufficeInvestors must delve deeper, assessing overall investment value first, followed by evaluation of dividend safety and growth potential.

Timing is also crucial in this game; investors should consider entering cyclical stocks during their troughs in stock price and earnings

Caution should be exercised towards stocks boasting high yields in such periodsFor instance, the Hong Kong stock logistics company OOIL (Orient Overseas International Ltd.) exemplifies a classic case in the cyclical high-dividend landscape, demonstrating an astronomical return to shareholders after a decade of downturns that transitioned into a period of profitability.

Ultimately, the company’s business model profoundly affects the health of its balance sheet, which ultimately influences its ability to pay dividendsManagement integrity and the willingness to issue dividends form the foundation for potentially receiving these cash distributionsA prime example of this challenges the popular optimism surrounding many growth stocks, like Bilibili or Youku—companies still grappling with issues of cash flow due to continuous capital expenditures without the promise of dividends.

In recent years, many companies listed on the A-share market have pivoted to more closely align with principles of cash dividends, with central state-owned enterprises taking the lead in committing to substantial dividend payouts

By emphasizing profit and net asset return ratios rather than merely pursuing expansive growth, companies can now command increasing market valuations in response to their dividend strategiesLooking ahead, it's evident that high-dividend strategies are becoming increasingly applicable within the A-share market.

The prevailing trends also manifest in Hong Kong’s stock market, where a multitude of high-yield dividend stocks have appeared amid market sluggishness, presenting opportunities that echo Graham's philosophy of value investing.

For instance, consider KANG HORN PHARMACEUTICALS, which I have held for over two yearsTheir recent financial report for 2022 showed revenue of HK$2.34 billion, a 14.4% year-on-year increase, with profits climbing by 15.7% year over year to HK$683 million and a dividend payout of HK$0.30 per share, constituting 30.5%. The company's unique product is urine toxin-clearing granules, primarily targeting chronic kidney disease, with a staggering prevalence of 10.8% among the adult population in China, representing over 132 million patients