Dividend funds offer reliability and convenience for investors. They are classic equity funds that place a particular focus on higher-than-average and/or rising dividend yields during the stock selection process. In times of low interest rates, high-dividend equities are deemed an alternative to interest-bearing securities.
1. Profit participation through dividends – how does this work?
A dividend is part of the profit generated by a company limited by shares and is generally paid to shareholders once a year. This means that the company allows its shareholders to participate in the profit in the amount of the dividend.
2. What is meant by a dividend yield?
To determine the dividend yield, the dividend to be paid by a company is divided by the share price. To give an example: if a company limited by shares pays a dividend of EUR 5 per share at a share price of EUR 100, the dividend yield is 5 percent.
3. Are dividends the new interest rates?
The statement that dividends are the new interest rates is intended to draw attention to the fact that most Eurozone government bonds are offering little in terms of yields during the ongoing period of low interest rates, and that dividend yields are often higher. Nevertheless, there are, of course, differences between high-dividend equities and fixed-income investments. Like the interest payments, dividend stocks offer the prospect of regular distributions. However, dividends can be reduced or canceled at any time. There is also always the possibility that share prices may fall, and investors could suffer a loss despite the dividends.
4. What is the difference between High-Dividend Equities and Bonds?
Equities differ fundamentally from bonds in terms of their risks. A bond (theoretically) starts at 100 percent, and also ends there. The buyer of a bond therefore takes on no or a very low level of price risk upon maturity. This is not the case with an equity. Its price can fluctuate considerably – and a sharp price loss can quickly nullify even the most attractive of dividend yields. What applies to a single equity fundamentally also applies to several equities that make up a fund.
5. Are companies required to distribute a dividend?
Companies are under no obligation to distribute a dividend. In years in which a company does not perform well, a dividend may be reduced or even canceled.
6. Are dividends important for the performance of an equity?
Dividends are a very important source of return for equities. This is revealed by a simple look at the DAX performance index and the DAX price index. The DAX performance index is the standard leading German index. In contrast to the price index, it incorporates dividends. Just how important dividends are for the performance of equities can be seen, for example, by the fact that the performance index is quoted significantly higher than its little brother, the price index.
7. Which equities are included in a dividend fund?
The level of the dividend yield is one of the criteria that determines whether an equity is included in a dividend fund. A further important factor is whether the dividend can be paid from a profit or whether the company’s capital has to be weakened to this end. A high dividend yield may also be a sign of an impending crisis at a company. The more regular the distributions, the fewer the fluctuations there tend to be in a dividend fund.