1 | what is the dividend strategy?
The dividend strategy is an equity investment approach that invests investors in companies that pay out a large portion of their profits to shareholders each year . This profit distribution from a stock corporation to its investors is called a "dividend". Whether anything at all and, if so, how much is distributed, will be decided at the annual general meeting of the respective company. In addition, companies that are suitable for the dividend strategy often have a high dividend yield. The dividend yield is a classic measure for the valuation of a share and refers to the ratio of the profit distribution to the share price times 100%.
The dividend yields of DAX stocks are usually 2% to 3%.
There are companies that are keen to steadily increase their dividend payout. Those who manage to do so over 25 years can count themselves among the dividend aristocrats. Incidentally, investors who do not want to look for the stocks with the best dividend distribution themselves can also buy special ETFs for them. For example, there is the DivDAX, an index that only includes companies with high dividend yields. But beware: There are only 15 individual titles in the DivDAX - so there is no sufficient risk distribution guaranteed!
2 | Where does the dividend strategy come from?
The inventors of the dividend strategy are Michael B. O'Higgins and Benjamin Graham. The difference between the two investors is that Graham simply selects the stocks with the highest dividend yield, while O'Higgins filters out those stocks with the lowest price.
3 | Advantage of the dividend strategy
High dividend companies tend to be companies that are financially sound and therefore considered to be very reliable - for example, CocaCola, McDonald's, Procter & Gamble or 3M. If you hold these stocks in your portfolio, you can be pretty sure that you will not suffer a total loss or go through huge price swings.
4 | Disadvantage of the dividend strategy
However, because dividend strategists only select certain company stocks, they use stock picking. The disadvantage of this is that there is less risk diversification and at the same time the return on the overall portfolio is not optimal. For example, investors bypass all companies that cannot pay dividends or reinvest profits most often, such as young companies and technology companies.
5 | Evaluation of the dividend strategy
Investors should be aware when investing in stocks that stock gains are made up of stock appreciation and dividends. It does not make any difference to them from a profit perspective, whether a dividend is distributed or not. Because the profit is either way there - either in the form of the distribution or in the form of an increase in price. A dividend distribution always comes at the expense of price gains: The stock market corrects the price of the share on the "Ex dividend day" after the Annual General Meeting by the amount distributed below. This is called the so-called dividend discount, After all, a company that pays a dividend is then poorer by exactly this amount and thus worth less. Thus, the dividend distribution for a company offers basically no advantage over a reinvestment. In addition, investors must be careful with the index "dividend yield":