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Investment advice
Investors benefit from company profits in the form of dividends and can strategically increase their returns.
For many investors, dividends are an attractive supplement to potential capital gains.
When you buy shares, you become a co-owner of the company and are entitled to a share in the profits. If the company generates a surplus at the end of the year, it can either reinvest it or pay out a proportion of the amount as a dividend – annually, every sixth months or every quarter.
Dividends are paid per share and vary depending on the company’s performance. The more shares you own, the higher your proportion of the dividend.
More than 80% of the companies listed on the SIX Swiss Exchange regularly pay dividends rather than reinvesting their entire profits. Dividends generally increase in line with annual profits. However, some companies pay dividends even when profits are low – usually from reserves or to signal stability. Falling dividends or no dividend payments at all are often seen as a warning sign and can trigger a drop in share prices.
Investors can find clues about future payouts by looking at the dividend policy of recent years and checking free cash flow figures. Companies that do not pay dividends are typically either growth-oriented firms that reinvest their profits or companies facing financial difficulties.
Depending on company policy, British and US companies pay dividends once a quarter, every sixth months or annually, whereas in Germany, Austria and Switzerland, dividends are typically paid annually. After the close of the financial year, the Executive Board proposes a dividend, which is approved at the Annual General Meeting. To receive the dividend, you must own shares on the ex-dividend date, shortly after the meeting.
Annual General Meetings are usually held between February and July, with Switzerland’s dividend season peaking in April.
Dividends generally remain taxable, as they are regarded as income. However, tax-free dividends arise when a corporation makes distributions from its capital contribution reserves (CCR). These reserves are formed from capital increases in which shareholders paid more than the par value. Since they represent repayments to the shareholders, they have been exempt from income tax and withholding tax in Switzerland since the 2008 tax reform.
Companies with stable dividends are considered safe havens thanks to their generally low-risk business models – especially during periods of market volatility. Over the long term, they often generate higher returns with lower risk (volatility) than the broader market. However, growth companies that do not pay dividends – such as Alphabet, Meta or Tesla – can also be attractive: they reinvest their profits to fuel further growth and impress investors with their innovative strength and future potential.
An attractive dividend can be welcome news for shareholders – but it should always be viewed in the proper context. This is because a high dividend yield isn’t just the result of strong financial performance, but can sometimes also be due to a drop in the share price or excessive payouts.
Anyone who wants to realistically assess a company’s dividend potential should examine key figures such as return on equity, free cash flow, balance sheet quality, management stability and the sustainability of the business model.
Since this can often be complex for individual investors, it’s worth seeking professional guidance – for instance from the experts at UBS.
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The dividend yield shows what percentage of the share price is paid out as a dividend. It is calculated by dividing the dividend per share by the share price.
For example: If shares are trading at CHF 100 and pay a CHF 3 dividend, the dividend yield is 3%.
A higher yield generally means a more attractive payout for investors.
Apart from a crisis situation at a single company, a global economic downturn can lead to a decline in profits – and hence to lower dividends. In the event of major economic upheavals, the tax authorities may sometimes advise certain companies to suspend dividend payments or even require them to do so.
Dividend-paying securities offer the advantage of a regular income that is independent of share price movements. They have a stabilizing effect during market downturns and are typically issued by financially sound companies.
However, one drawback is that reductions in dividends or a lack of dividend payments altogether are often seen as a negative sign and can lead to a decline in share prices and a loss of income.
Anyone who wants to invest in shares or other securities must first decide whether to do so on their own or to entrust a bank with the task. If you decide to do it yourself, you will need to open a securities account.
Dividend-paying securities are available as individual shares or as investment funds (e.g. ETFs) that focus on high-dividend-paying companies, thereby spreading risk more broadly.
When purchasing dividend-bearing securities, you should pay particular attention to the following points:
Shares that meet these criteria are shares in high-dividend yield companies or “dividend gems.” In Switzerland, examples include Nestlé, Novartis, Roche, and many other companies listed on the Swiss Market Index (SMI).
As part of a yield-focused investment strategy, dividends are typically reinvested in shares that also pay dividends. If investors consistently reinvest their dividend-bearing securities, they can multiply their returns over the long term. This is because with this type of reinvestment, the returns grow exponentially – due to the compound interest effect.
The chart below illustrates how reinvesting dividends would have affected the S&P 500 Index of the US stock market. Returns are compared with and without the reinvestment of distributions. Conclusion: compound interest allows you to achieve better returns.
Once the “dividend season” is over, it makes sense to carry out what is known as “rebalancing.” This involves assessing how best to invest the dividends you have received so that the allocations across the various asset classes align with your strategy again. This is the best way to ensure that your assets are diversified and grow in a risk-optimized manner over the long term.
Companies share their success with shareholders and, through dividends, offer attractive prospects for regular income.
You should obtain sound investment advice to tailor your investment strategy specifically to your personal financial goals. The experts at UBS will be happy to assist you.
Arrange an appointment for a nonbinding consultation, or if you have any questions, just give us a call.
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