Dividends have become the yield driver of capital investments, not least since the phase of negative interest rates heralded by the Swiss National Bank (SNB) in January 2015. It was as far back as the 1930s that the economic scientist Benjamin Graham, regarded as the father of fundamental securities analysis, recognised the important role of profit distributions. His argument, often quoted to this day, is that investors should only buy shares that can afford a high dividend payout year after year. The distribution of earnings not only ensures regular coupons, which are a critical advantage in periods of historically low interest rates worldwide, but also makes a major contribution to stock market performance. According to calculations by Allianz Global Investors, dividends made up some 35% of the 11% p.a. overall return of the MSCI Europe between 1975 and 2020.
Dividends do not just drive performance, however – they are also a stabilising variable in share price movements. Whereas the average share performance in the MSCI Europe in the period from 2000 to 2005 following the bursting of the new economy bubble was an annual minus 6.7%, for instance, the dividend yield came to a respectable 2.2% p.a. It was a similar story during the financial crisis from 2005 to 2010. A "measly" rise of 1.1% p.a. on the index compared with a dividend contribution of 3.6%. Profit distributions can thus lend reassuring stability to a portfolio.
Nevertheless, it does not necessarily make sense to now rely mechanically on shares offering a high payout or dividend yield. What is needed is a close look behind the scenes in order to fish out the real dividend hits from the broad equities universe. That's because a number of factors can lead to an above-average interest rate, such as a sharp drop in the price of the share. Since the yield is calculated as the ratio of dividend to share price, a falling quotation results in a rising yield. A significant fall in the share price may be triggered by operational problems within the company, which will in turn reduce the profit that is distributed. One-off payouts, such as after the sale of business units, can also cause the dividend yield to jump one year only to fall again the next. One of the decisive factors, therefore, is how sustainably a dividend is paid.
A continuous distribution history is one of the four systematic selection criteria applied by the DividendenAdel indices focused on Switzerland and Germany that were brought into being by the renowned investor and author Christian W. Röhl. The other factors determining inclusion in the strategy index are the payout ratio, yield and growth. Taking one thing at a time, though, when it comes to sustainability only those companies which have not cut their dividend for at least three years in a row are considered. It is also essential that the payout has been increased at least three times over the last ten years and also rose in the previous year. As for the payout ratio, the method stipulates that between one quarter and three quarters of the total profits realised must have flowed to the shareholders over a three-year term. Finally, only stocks whose dividend yield reaches a cumulative value of more than 1% p.a. over a historic period of five years are taken into consideration. That this sophisticated procedure pays off is demonstrated by a glance at the movement of the DividendenAdel Schweiz Index share price: since its launch on 3 January 2021, it has delivered growth of 11.6%, a performance that is 2.3 percentage points better than that of the SMI.
Source: Allianz Global Investors
View more information on investment solutions on the topic “Dividends: An Attractive Revenue Stream”
