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Created on 28.08.2019

Dividend strategy – why it’s worthwhile

In the current low interest rate environment, shares with high dividends offer exciting opportunities to generate returns. The dividends paid by solid, highly profitable companies has become an important purchasing argument for some investors over recent years.

In times when savings accounts pay hardly any interest and bonds with a good credit rating only offer the opportunity to generate low returns, many investors are turning their attention to high dividend shares. The “dividend season” starts in spring: the presentation of the annual results for the previous financial year and the general meetings in the first and second quarters are key factors for dividends, which are usually paid out to shareholders by the end of the second quarter. During this period, the prices of shares that offer the prospect of high returns often rise on the stock exchange. This is directly related to dividend payouts.

Dividend yield drives prices up

The dividend is generally paid out on the day after the general meeting when securities are traded “ex dividend”. This means the price is reduced by the full distribution amount. The letters “exDiv” or “xD” are added to the prices so that investors can immediately recognize these securities on the stock exchange. Solid dividend shares generally make up this difference within weeks or months of the payout. Investors anticipating a rapid recovery in the share price can buy the shares on the day before the dividend payout, get the dividend and then sell them on again once the price has risen. In the case of shares where investors expect a high dividend yield, the price sometimes rises weeks or months before the dividend payout date due to high demand. 

Dividend payments are also attractive from a tax perspective

High dividend shares are much sought after by investors not just because of their profit distribution per se, but also for tax reasons. Since the 2008 corporate tax reform, repayments from a company’s reserves from capital paid in have been exempt from withholding and income tax. More information on the correct taxation of investment returns can be found in the article “How to pay tax on returns on investment”.

Find the right dividend shares

Working out which companies will provide sustainable dividend returns is not an easy task. Focusing solely on dividend yield is a risky approach – it can sometimes appear very high because the share price has previously fallen sharply. That’s why it’s important to also take the past performance of company dividends into account. For how many years or decades have dividends regularly been paid out? And how much?

Check companies and key financial figures

To properly assess whether high dividends can be expected over the long term, investors should thoroughly run the rule over the company and its key financial figures. These include return on equity, a good free cash flow position, a consistently solid balance sheet, stable management, a future-proof business model and constantly good positioning in the competitive environment of the sector. If you want to determine whether the company has the potential to increase dividends over the coming years, it is important to keep track of the dividend policy and strategy of the company.

Investors pursuing dividend strategies and who are looking to replace the unattractive yields on bonds with high dividend shares must be willing to accept greater price fluctuations than, for instance, with bonds. Shares of companies with consistently high profits, which have pursued a successful dividend policy for many years, are the best option. These shares with high dividend yields are generally also less volatile and, in turn, less susceptible to fluctuations than those with lower dividend payouts.

Dividends – an attractive investment option

Dividends can help investors through times of low real interest rates. They offer tax benefits – if the payout is made from the capital reserves – and can also bring a certain degree of stability to your custody account. However, if you want to invest with a focus on dividends, you’ll need to carry out a thorough analysis of the company to accurately estimate whether investing in the shares selected is worthwhile and a dividend payout is likely in future. There are further options open to investors interested in such shares, such as investing in equity funds which as part of their investment universe include shares of companies with high dividend returns. 

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