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Dividends
What You Need to Know About Company Profits
A dividend refers to the distribution of profits by a public company, usually in the form of cash dividends, rarely in the form of bonus shares.
A common misconception:
Stocks with a high dividend yield have become highly popular since the fixed interest payments of fixed-income investments have fallen to a minimum. Dividends are the new interest! Really? This perception is mistaken. Profit distributions are often and falsely viewed as additional income. In practice, theoretically, it doesn’t matter what strategy a company pursues. On the dividend day, which is long known in advance, the share is traded ex-dividend and is usually quoted adjusted by the exact discount. Therefore, whether a stock increases by 12 percent and pays no dividend, or achieves 10 percent + 2 percent dividend, makes no initial difference to you.
Criticism of a one-sided view:
We will now address the benefits of dividend stars since most of the values on our watchlist generously distribute them to their shareholders. However, it is essential to put the facts in the right light. Isolatedly considered, profit distributions are not a quality feature. Every euro or dollar paid out is no longer available to the company; the investor receives and taxes it. However, it is entirely possible that the capital is much better off on the company’s side, such as to drive expansion, acquire profitable companies, or build reserves for tough times. In other words: If a public company manages to generate more than one euro in profit from every euro invested, then it is sometimes better off on the balance sheet than with the shareholder.
This is why we like dividends:
The dividend yield is one of the ten criteria in our stock-checks (readers of our premium investing service VF-Invest will know what I`m talking about). So, is it a coincidence that most potential purchase candidates of our Long-Term Portfolio have been making constant or increasing distributions to their shareholders for years? No. Our watchlist consists mainly of market leaders who have proven their highly profitable business model for years or even decades, defying every crisis and withstanding any stock market turmoil due to their solid balance sheet. The growth of such companies does not double overnight, but their profits are predictable. Admittedly, considering these factors, you may not be part of the next Apple story from the beginning. However, please consider that during the same period, 20 companies in the sector have gone bankrupt.
Dividends are:
- Profit distributions
- A sign of stability
- An indication of sustainability
- By no means to be considered in isolation
Our Conclusion:
Dividends hold significant importance for long-term investors. A study by Ibbotson Associates reveals that since 1926, the S&P 500 has achieved an annual performance of 9.98 percent, with only 5.72 percent attributed to stock price development, while the rest stemmed from dividend distributions. While it’s essential not to overvalue dividends, adopting a dividend strategy can be particularly advantageous, especially for conservative investors at a later stage of their wealth accumulation journey. Our Dividend Strategy, integrated into our premium investing service VF-Wealth, aims to establish a sustainable and steadily increasing passive income.
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