Due to low interest rates, high-dividend shares are a popular investment. Investing in stock ETFs also allows you to earn dividends.
When interest rates are at their lowest, it is possible to get a good return from high-dividend shares. In fact, dividend based strategies are in vogue today.
To illustrate the importance of dividends in terms of performance, it is sufficient to compare the advance SMI index and the minimum wage. The SMI, which is a price index, does not take dividends into account. The minimum wage, on the other hand, is a performance index: it also measures the performance of the 20 SMI shares, but including the dividends paid by the companies represented. Between 2010 and December 2018, it achieved a return of around 70%, compared with around 41% for the SMI (see graph).
Importance of dividends in terms of yield
Anyone who prefers to invest in an ETF that covers an entire stock market rather than individual stocks also benefits from dividend payments. Each equity ETF redistributes dividends to the investor, either by paying the corresponding amount into the investor’s account or by reinvesting them.
Reinvestment of dividends is often referred to as “capitalisation”. ETFs invest dividends in the shares represented in the index. For the investor who is considering reinvesting dividends, an accumulation ETF is the right choice as buying new ETF shares would incur additional costs.
Dividends received are subject to income tax, whether paid directly to the investor or reinvested in the ETF. The taxable values and taxable income of all ETFs traded on the Swiss Stock Exchange can be found in the price lists published annually by the Federal Tax Administration.
High-dividend stock ETF
ETF issuers have been offering ETFs that focus on high-dividend stocks for some time. If you look up the term “dividend” on the Swiss stock exchange’s website, you can find over 30 ETFs. It is advisable to consult the information sheet for the ETF in question to find out the selection criteria for high dividend securities before opting for such a product.
Furthermore, you should never base your choice solely on expected dividends, but also take into account your own financial situation and the fact that shares and equity ETFs are subject to wide price fluctuations.
In short, along with life insurance, ETFs seem to be an ideal solution to boost savings at low cost. However, be careful not to give in to the convenience of passive management. While effective, this method of management is not without risk. Savers may consider mandated management and delegate the arbitration of their baskets to an expert.