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If you are interested in investing in equities, you may at first only look at the share price performance. The bigger the upside potential, the bigger your interest. Therefore, the focus of many investors recently has been on growth shares from the technology sector. The fact that shareholders do not only benefit from rising share prices, but also participate in company profits has been somewhat relegated to the sidelines. But now, with the markets going sideways and the volatility of growth shares on the rise, this aspect has gained relevance. After all, it offers investors a welcome chance to earn a profit from shares even if the prices are not really moving. And even in the case of falling prices, shares that pay out high dividends can absorb some of the losses. At the moment, there are a lot of favourable aspects attached to shares of companies that have paid solid dividends for a long time.
What is a dividend?
The purchase of a share makes the buyer a co-owner of the respective company. Therefore, shareholders also usually participate in the profit of the company; in other words, they receive a dividend.
What is the level, the amount of the dividend based on?
Upon successful conclusion of a fiscal year, the owners decide at the Annual General Meeting (AGM) whether and how much dividend will be paid out. The amount is based on the financial situation of the company and takes into account the expected business performance. Basically, the owners can decide for the company to pay out a dividend even if the past fiscal year was negative but there is a substantial capital reserve that is not required.
How often are dividends paid out?
In Europe, usually once a year to all shareholders.
Does a company HAVE to pay out a dividend?
No – the dividend is no foregone conclusion and there is no legal right to receive one. If it is important for the success of the business, the entire company profit can be used for investments or to form reserves. While the shareholders may fall short of receiving a payout at that point in time, there is the chance that the profits that were ploughed back by the company will lead to rising share prices in the long run.
What happens to a dividend in an investment fund?
An equity fund holds investments in several companies. When they pay out dividends, there are different options:
- Either the dividends are pooled and then paid out in full to the fund owners via deposit into their account
- Or the dividends are used for additional purchases. In this case, with the fund certificates referred to as accumulating, the fund owners do not receive any payout, but their fund shares increase in value due to said purchases
What is the dividend yield?
The dividend yield is a ratio by which the profitability of a share can be assessed. It is expressed as the dividend paid out divided by the share price. A dividend of EUR 10 per share and a share price of EUR 200 therefore gives you a dividend yield of 5%.
The higher the dividend yield, the more interesting the share becomes for investors. The reason is obvious: these shares promise an attractive annual profit participation, and a high dividend yield signals a successful business. One word of caution though: a high dividend yield may also be the result of a rapid share price decline. Therefore, one should also resort to other key ratios when assessing a share, e.g. the price/earnings ratio or the equity ratio.
How do shares with high dividends perform?
Since investors want to invest their money as profitably as possible, this is an exciting question: which is better in the long run – growth shares, whose price increases are steep but which do not pay high (or any) dividends, or dividend shares, which pay reliable dividends without major price spikes?
The answer is surprising: on the basis of the MSCI World index, one of the most important equity indices in the world, dividend shares outperform growth shares in the long run (see the graph below). The continuity with which these companies pay out their dividends is therefore no coincidence; and quality is reflected in the share price in the long run.
Share buy-back vs. dividend payout – what is the difference?
In addition to divided payments, companies have another way of returning capital to their investors: the share buy-back. This is how it works: by buying its own shares, the company reduces the number of shares traded on the stock exchange. The reduction leads, all other things being equal, to a rise in share prices, from which the shareholders benefit. Also, the dividend part of the group profit can be split among fewer shares; this is where shareholders benefit again, this time from higher dividends. The companies benefit as well: the share buy-back usually increases the earnings per share.
Equites with strong dividends under one umbrella
Investors who would rather delegate the informed selection of shares with high dividend yield should leave it to experts in the field and invest in a dividend fund – such as the ERSTE RESPONSIBLE STOCK DIVIDEND fund.
This equity fund invests globally in the shares of selected companies in the developed markets that are subjected to a fundamental analysis. In selecting the securities, Erste AM focuses on companies with high to medium market capitalisation, attractive dividend yield, and relatively low historic volatility.
The level of the dividend yield is only one criterion of whether a share should be admitted into the fund or not. It is also crucial to see whether the dividends can be paid from profits or whether the company has to eat into its own assets. A high dividend yield could also be the sign of an imminent crisis of a company. The more regular the dividend pay-outs, the lower the volatility – which is also the goal of ERSTE RESPONSIBLE STOCK DIVIDEND.
At the moment, the portfolio dividend yield amounts to 4.75% (information provided by Erste Asset Management as of 23 June 2022). Most recently, we have reduced the allocation of shares in the IT and the commodity sectors and increased the weighting of defensive sectors such as consumer goods, healthcare, and telecoms.
Focus on sustainability – not only in terms of dividend
The managers of the ERSTE RESPONSIBLE STOCK DIVIDEND fund target the shares of companies that are ESG (environmental social, and governance) pioneers. As part of our holistic ESG approach, we also take into account ethical aspects.
We generally do not hedge foreign exchange risks, but we will not rule it out. The fund pursues an active investment policy and has no benchmark index. The assets are selected discretionarily, and the margin of discretion is unlimited.
Investing in dividends with a plan and a goal
Investors who want to make use of the perspectives offered by high-dividend shares can invest a lump sum in ERSTE RESPONSIBLE STOCK DIVIDEND or build capital on the basis of a fund savings plan (s Fond Plan) with as little as EUR 50 a month.
For more details, you may want to speak to an adviser in one of the Erste Bank and Sparkassen branches. The investment experts will be happy to discuss all your questions, take into account your individual ideas and plans, and develop a tailor-made investment strategy.
ERSTE RESPONSIBLE STOCK DIVIDEND – opportunities and risks at a glance:
Benefits for investors
- Broad diversification across equities from developed markets
- Participation in companies that act in line with high environmental, moral, and social standards
- Active stock picking on the basis of fundamental criteria
- Chance of attractive ongoing return and value increase
Risks to be aware of
- The price of the fund may be subject to strong fluctuations (high volatility)
- Due to the investment in foreign currencies, the fund value may be affected by foreign exchange fluctuations
- Capital loss is possible
- Relevant risks for the fund are in particular: credit and counterparty risk, liquidity risk, custody risk, derivative risk, and operational risks. For comprehensive information about the risks associated with the fund, please refer to the prospectus and the key investment information pursuant to sec. 21, part II, chapter “Risk Notifications” of the Austrian Alternative Investment Fund Managers Act
For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management
Legal note:
Prognoses are no reliable indicator for future performance.