Dividend Champions: With Interest and Capital Gains You Can Have Your Cake and Eat It

Dividend Champions: With Interest and Capital Gains You Can Have Your Cake and Eat It

Instead of interest income from bonds, investors can opt for stocks that pay attractive and long-term dividends. These dividend securities usually come from stable companies, providing an opportunity to benefit from capital gains in addition to a dividend payment. In some circumstances investors will benefit twice.

With today's low interest rates, investors are looking for investments that produce higher returns but nevertheless offer a certain degree of security. Investors are increasingly turning their attention to defensive stocks with a regular, attractive dividend payment. At the moment, the dividend yield on such stocks is higher than the yield on 10-year government bonds in many countries – in particular Switzerland, with its low interest rates.

Look for a Consistent Dividend Payout

Companies with a consistent, attractive dividend distribution tend to have a less risky business model. That's why they are often seen as a safe haven, particularly in times of high price volatility. Historically speaking, they have delivered a higher return than the broad equity market yet with simultaneously lower risks.

A glance at the dividend policy of previous years as well as free cash flow is a good way to assess whether the company is likely to continue paying an attractive dividend in future. In addition, most companies try to avoid cutting their dividend given the signal such a move would send out.

Opportunity for Capital Gains in Addition to Dividend Yield

Compared with the interest income on bonds, dividend stocks offer other advantages in addition to dividend yields: the opportunity for capital gains. If the world's stock exchanges are performing well, defensive dividend securities generally benefit as well. At the same time, past experience shows that they suffer less in falling equity markets.

Investing in Dividend Champions

Private investors can purchase dividend champions directly in order to benefit from regular distributions. However, it is important not to weight individual stocks too highly and instead to diversify into different stocks. Otherwise a price loss could lead to a significant loss for the portfolio.

To reduce the risk, investing via a fund is a suitable option for many private investors. Funds invest in a large number of securities simultaneously, and through this diversification they minimize the degree of price volatility. Some equity funds have a strategy that is focused specifically on dividend income. Here fund managers analyze the companies and only include the most attractive ones in the fund.

Such a solution means investors can be sure their assets are well diversified; in addition, they benefit from the research expertise of financial institutions and the fact that their portfolio only contains promising dividend stocks. Depending on the dividend fund, the dividend is paid out to the owners of the fund or reinvested.

What Is a Dividend?  

A dividend refers to the portion of a company's profit that it distributes to its shareholders. This can be carried out annually, semi-annually, or quarterly. The amount will be determined by the executive board and must be approved by the general meeting of shareholders. Companies do not have to pay a dividend, and may use the company's profit internally. A distinction is made between a regular dividend and a special dividend. The latter should be regarded as separate from the company's regular dividend payments. 

When Is the Dividend Tax-Free?  

Dividend payments are treated as taxable income for shareholders. There are exceptions, however: where the dividend is paid out of capital reserves rather than net income, for example, or where a par value repayment is made. In these cases, the distribution will be free of withholding tax for private investors.