Invest successfully Dividends – your share of company profit

Growth companies that do not pay dividends may well be of high value, e.g., Alphabet (Google) and Meta Platforms (previously Facebook). Long-term dividend growth usually suggests a financially sound company with a high enterprise value. By contrast, falling dividends suggest the company may have financial problems.

Apart from a crisis situation in a single company, a global economic slump can lead to a decline in profits and, as a result, to a loss of dividends. In the event of very severe economic downturns, state financial authorities can advise some companies to suspend dividend payments or even force them to do so.

Significant interest rate rises also put the dividend amount at risk. This is because stocks with a high dividend yield are considered as an alternative to bonds to some extent. The latter therefore become more attractive as interest rates rise. On the other hand, rising interest rates are usually associated with an increase in inflation. Stocks in companies in growth industries that do not pay dividends usually then have to struggle more.

Geopolitical events such as Russia's invasion of Ukraine can also impact dividend yields. They lead to a downturn in economic activity and can also directly impact a company's returns if, for example, the company loses export business, the price of raw materials or energy plays a key role for it or supply chains are interrupted.

At the end of the financial year, the executive board will make a proposal for the amount of the dividend per share. This proposal will then be adopted at the Annual General Meeting, shortly after which the dividend will be paid. In order to benefit from the dividend, an investor must be in possession of the share on the day when the right to the dividend expires on the stock exchange (the “ex-date”). This is usually shortly after the Annual General Meeting. These take place between February and July at the latest, with the month of April in Switzerland being the high season in the dividend year. In other countries, such as the USA, companies may pay out dividends quarterly or even monthly.

The term “tax-free dividend” can often be found in annual company reports, but it is not entirely correct. It refers to tax-free repayments of capital contribution reserves to stockholders. These arise when buyers pay more than the par value listed on the share. Since the capital actually belongs to the stockholders, this repayment is tax-free for most private investors in Switzerland. The dividend, on the other hand, is subject to income tax as a share in profit. As a rule, the withholding tax is deducted directly from the gross amount paid out, but can be reclaimed in your tax return.

A clear impact of dividend distribution on the share price cannot be verified. There are investors who buy securities shortly before the ex-date (ex-dividend date) in order to benefit from the dividends, which can lead to a disproportionate increase in the share price. And the price on the day of the ex-date is, in principle, reduced by the amount of the dividend, because the dividend payment represents a loss of company value. But since the stock price is primarily determined by supply and demand, this is not always reflected 1:1 in the stock price.

With a yield-focused investment strategy, dividends are usually reinvested in stocks that also pay dividends. The investment strategy defines the proportion of investments held in stocks and those held in other investments, so that a rebalancing can be carried out after the dividend season. This involves examining how the dividends paid out can be best invested to realign the stocks of the various asset classes with your strategy. Your assets are then most likely to be diversified and to grow on a risk-optimized basis in the long term.