How to Invest in Dividend Stocks

Alongside capital gains, stock dividends are a second source of returns on stock market investments. This guide provides the basic knowledge you need to begin using shareholder dividends in your investment strategy.

What are stock dividends?

A stock dividend is a portion of a company’s profit that is paid out to the company’s shareholders. Each shareholder receives a fixed dividend for each share that they own.

Next to voting rights, dividends are the most important privilege that comes with owning shares in a company. However, companies are not obligated to pay out dividends. With permission from shareholders, a company can use its profits for other purposes, such as investments. Some large companies like Amazon and Tesla, for example, do not pay out dividends to their shareholders.

How big are stock dividends?

Normally, a company’s executives decide how big the dividend should be, and make a recommendation at the company’s annual general meeting. In Switzerland, dividends are normally paid out once a year, but in the United States, dividends are often paid out on a quarterly basis.

The value of a stock, with regards to the dividends it yields, is indicated by the stock’s payout ratio. This figure shows how much of a company’s profit was paid out to its shareholders. For example, if a stock has a payout ratio of 25 percent, then one fourth of the company’s profits are paid out to shareholders. It is possible for a company to have a payout ratio above 100 percent. That can happen when a company pays out money from its financial reserves to its shareholders.

Another key figure, the dividend yield, shows how high a company’s dividends are in relation to its stock price. This figure is calculated by dividing the gross, per-share dividend by the current stock price, and then multiplying the result by 100.

Table 1: Stocks included in the Swiss Market Index (SMI), sorted by dividend yield

Stock prices are based on the closing prices on December 10, 2024, as per SIX. The sources for payout ratios are fuw.ch and morningstar.com.

How are dividends from Swiss stocks taxed?

Dividends from Swiss stocks are generally subject to Swiss income taxes, and an anticipatory tax is deducted to ensure this. You have to declare your gross dividends along with your other taxable income in your tax returns. The 35 percent anticipatory tax is refunded after you correctly declare the stock in the securities declaration form of your Swiss tax return.

How are dividends from foreign stocks taxed?

Dividends from foreign stocks are typically subject to a withholding tax in the country where the company is domiciled. Whether or not you can reclaim foreign withholding taxes depends on whether or not Switzerland has a relevant double taxation agreement (DTA) with that country. You can find more information in the moneyland.ch guide to taxes on investment profits.

How important are dividends when selecting stocks?

Dividends are, along with possible capital gains, part of the return that you earn from a stock investment. When a company pays out dividends to investors, it sends a positive signal. It normally means that the company is making a profit. Additionally, dividends provide a flow of income that can be reinvested. Dividends can have a motivational effect.

However, the amount of focus you should place on dividends depends primarily on your investment strategy. In a dividend-based strategy, the reliability and size of dividends are the most important criteria. But if your aim is to profit from capital gains in the value of stocks, then your focus should be the potential for growth in the industry sector, and for the company itself. You can learn more in the moneyland.ch guide to investment strategies.

An extraordinarily high dividend can be a warning signal. A company may pay out very high dividends to its shareholders when the value of its stock is in decline, or if it expects a loss in value. By offering high dividends, the company hopes to attract or retain investors. These high dividend payments normally are not sustainable. For example, if the price of a stock with a 3 percent dividend yield were to fall by 80 percent, the dividend yield would shoot up to 15 percent, but the actual dividend per share would remain exactly the same.

What are dividend aristocrats?

The term dividend aristocrats refers to exchange-listed companies that have consistently increased the size of their dividends for 25 consecutive years. According to a report by Swiss bank Vontobel, there are 15 Swiss stocks that fall into the category of dividend aristocrats. There are also foreign companies, such as Coca Cola and IBM, that have this classification.

Table 2: Swiss dividend aristocrats

*Strictly speaking, this company does not yet fulfill the requirements to be classified as a dividend aristocrat, as it has only paid out dividends since 2012. Sources: Cash.ch, Vontobel. Date: December 12, 2024.

Dividends that remain stable or even get bigger over long periods of time indicate that the company’s business model is sound, as the company remained profitable even during periods of crisis. But it is important to keep in mind that companies are classified as dividend aristocrats based on past dividends. While the chances of a positive trend continuing are high, there is no sure way to know how things will develop in the future.

Are there any ETFs that specialize in stock dividends?

If you want to focus your investment strategy on stock dividends, then exchange-traded funds (ETFs) that specialize in dividends are one way to do it. The cost of using ETFs is low compared to the cost of using actively-managed mutual funds.

Table 3: Examples of stock dividend ETFs, ranked based on their total expense ratios (TERs)

Source: fund managers. Date: December 12, 2024.

The ETFs listed in Table 3 all use full physical replication. That ensures that the fund actually holds the stocks, rather than using swaps. Physically replicating ETFs are considered safer than ETFs that replicate stock performance synthetically. From a tax perspective, it is advantageous to use an ETF that is domiciled either in Switzerland, Ireland, or Luxembourg.

Note: This article is provided for informational purposes only and should not be construed as investment advice.

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