What is a dividend?
With a dividend, a stock corporation gives its investors a share in its profits. This is done with an annual distribution, also called a dividend. By buying shares, you can participate in the dividend payments.
Dividends are particularly interesting for savers who want to build up their assets sustainably over the long term. In the long term, shares have a higher yield compared to bonds. This is particularly noticeable with a long-term investment horizon.
Dividends therefore play a significant role in your wealth accumulation. In addition to a long investment horizon, investors should also have a higher level of risk awareness. The effect of a higher yield due to long-term planning is considerable.
What is a dividend yield and why does a company pay it?
Dividends are a form of profit sharing. Every company strives to make a profit. It usually uses part of the profit to invest in its own business. The rest is distributed to the company’s shareholders – for each share they receive a dividend.
And what is the dividend yield? Some people compare it to interest rates. It tells you how much money the investor will receive in the end.
Holders of funds participate in the dividend payments of many companies. This has two main advantages for investors: First, dividends function as a risk buffer. In the event of price declines, the loss in value can be absorbed or minimized with their help. Secondly, the dividends paid by the companies generate current income.
Dividend payments are regarded worldwide as a hallmark of healthy companies. After already very successful dividend years, experts expect dividend payments worldwide to continue to develop positively.
However, investors should note that dividend payments in the past are not a reliable indicator of future dividend development. A decline in dividend yields cannot be ruled out.
Do all stock corporations pay dividends?
Not all companies pay a dividend. This is because profits do not have to be distributed. Around 40 percent of international companies and even 60 percent of U.S. companies pay no dividend at all.
This includes many tech companies such as Google or Amazon. They reinvest all their cash back into the business. There may be strategic reasons for this: Companies prefer to invest the money in themselves in order to grow faster.
What should you look out for?
Dividend shares are considered to be a conservative investment, but the highest dividend payout is of little use if the share price falls at the same time.
The dividend yield, as published in stock exchange databases, for example, usually refers to the most recently paid dividends. These do not always reflect the reality of the company’s current business situation. Investors should therefore be aware of the company’s current figures.
A normal investor can hardly do this. This makes professional advice all the more important. Those who invest in actively managed dividend funds minimize the risk of individual shares.
Experienced fund managers know the company’s key figures and know where the risks lie. Your securities advisor at the savings banks can help you with up-to-date information.
How is your dividend yield calculated?
The amount of the dividend initially depends on how much money the company has in its coffers. On this basis, the management board of the stock corporation makes a dividend proposal. At the Annual General Meeting, the shareholders then vote by simple majority on whether or not to accept this dividend proposal.
The dividend yield is calculated using the share price. This means it is calculated by dividing the agreed dividend by the current share price. The result is then multiplied by a factor of 100.
The yields on dividends are often very pleasing compared with the interest rates on federal or corporate bonds. But it is not easy for ordinary investors to decide which companies offer the best dividend prospects in the long term.
The decisive factor is quality. All the better if an experienced fund management team takes a thorough look at the companies. In dividend funds, professional fund managers select the most promising stocks. By spreading the investment over a large number of companies, the risk is also reduced.
Investors should therefore not be guided solely by the dividend amount. Broadly diversified funds that allow you to participate sustainably in the dynamics of the capital market are particularly suitable for your asset accumulation. A good dividend strategy complements your portfolio.