Dividend

A dividend is the portion of a company's profit that is paid out to its shareholders. If you own a share in a company, you are a shareholder in that company. This means that you own a small part of the company. If the company is successful and makes a profit, it may decide to distribute some of that profit to its shareholders - this is the dividend.

They offer shareholders a way to benefit directly from the company's financial success without having to sell their shares. The amount of the dividend is proposed by the company's Executive Board and must be approved by the shareholders at the Annual General Meeting.

Dividend Distribution explained

A dividend distribution is the process by which a company distributes a portion of its profits to its shareholders. This distribution usually takes the form of cash, but can also be in the form of additional shares or other assets.

Here are the main steps and features of a dividend distribution:

1. Determination of profit: First, the company generates a profit. After deducting costs and taxes, the net profit remains.
2. Board of Directors' decision: The company's Board of Directors decides whether and how much of this net profit should be distributed to shareholders as a dividend. This takes into account how much capital should remain in the company to finance future investments or liabilities.
3. Approval of the supervisory board: In many countries, particularly in Germany, the Supervisory Board must approve the Executive Board's dividend proposal. The Supervisory Board reviews the Executive Board's recommendation and ensures that it is in the best interests of the company and its shareholders.
4. Approval by the Annual General Meeting: The proposed dividend must be approved by the shareholders at the Annual General Meeting. Once approved by shareholders, the distribution is determined.
5. Announcement: The company announces the date of the dividend distribution, the dividend amount and the record date (ex-dividend date). The record date is the last day on which the share must be held in order to receive the dividend.
6. Distribution: The dividend is distributed to shareholders on the specified payment date. In the case of cash distributions, the amount is transferred to the shareholders' account.

Dividend distributions are an important incentive for investors, as they represent a regular source of income and offer a direct share in the company's financial success. For the company itself, it is also a way of creating trust and attractiveness among shareholders.

Who receives the Dividend?

All shareholders of a company who own shares in that company on the so-called record date (ex-dividend date) receive the dividend. Here are the most important points that determine who receives the dividend:

1. Ex-Dividend Date: The ex-dividend date is the key date on which you must own the share in order to be entitled to the dividend. If you buy the share on or after the ex-dividend date, you will not be entitled to the next dividend payment.
2. Record Date: This is the date on which the company prepares the list of eligible shareholders. It is often one day after the ex-dividend date. All shareholders on the company's share register on this day are entitled to the dividend.
3. Distribution Date: The dividend is paid out to the entitled shareholders on the distribution date. This can be a few days to weeks after the ex-dividend date.

To receive the Dividend, you must:

• Buy the share before the ex-dividend date and hold it until at least that date.
• In some cases, make sure that your name appears in the company's share register on the record date (for registered shares).

It is important to note that ownership of the share on the ex-dividend date is the key to the dividend payout. Everyone who owns the share on this date will receive the dividend, regardless of how long they held the share beforehand.

When are Dividends paid out?

The frequency of dividend payments can vary depending on the company and geographical location. The most common payout intervals are:

1. Annual: Many companies, particularly in Europe, pay out their dividend once a year. The payment is typically made after the annual general meeting at which the shareholders vote on the dividend.
2. Semi-annually: Some companies, particularly in countries such as Australia, pay their dividends twice a year. These semi-annual payouts allow shareholders to benefit from company profits more frequently.
3. Quarterly: In the US, it is common for companies to pay their dividends quarterly. These regular payouts provide shareholders with a steady source of income.
4. Monthly: A few companies, particularly certain real estate investment trusts (REITs) and mutual funds, pay their dividends monthly. This provides shareholders with a steady cash flow.

The exact frequency of a company's dividend payments is usually set out in the company's articles of association or in the financial information published by the company's management. Shareholders can find this information in the company's annual reports or on its investor relations website.

How are Dividends paid out?

Dividends are paid out in several clearly defined steps and can be paid out in various ways. The main methods of dividend payment are explained below.

Cash Payment

• The most common form of dividend payment is cash payment. The dividend amount is transferred directly to the shareholder's bank account, which is linked to their securities account.
• In some cases, the dividend can also be paid out by check, although this is rather rare today.

Scrip Dividend

• Instead of a cash payout, companies can also issue additional shares to shareholders. This method is known as a scrip dividend.
• Shareholders receive a certain number of new shares in addition to their existing shares.

Wiederanlageplan (DRIP - Dividend Reinvestment Plan)

• Einige Unternehmen bieten Aktionären die Möglichkeit, ihre Dividenden automatisch in den Kauf zusätzlicher Aktien des Unternehmens zu reinvestieren.
• Dies erfolgt oft zu vergünstigten Konditionen und ohne Transaktionsgebühren.

Naturaldividende

• Eine Naturaldividende ist eine Form der Dividendenausschüttung, bei der Aktionäre nicht in Form von Bargeld, sondern in Form von Sachwerten oder zusätzlichen Aktien entschädigt werden.
• Diese Art der Dividende ist weniger verbreitet als die klassische Bardividende, bietet aber dennoch interessante Möglichkeiten für Unternehmen und Aktionäre.

The taxation of dividends depends on various factors, including the shareholder's country of residence and the legal form of the company. Here is an overview of how dividends are taxed in Germany:

1. Capital Gains Tax:
   • In Germany, dividends are subject to capital gains tax. The tax rate is a flat rate of 25%.
2. Solidarity Surcharge:
   • In addition to the capital gains tax, a solidarity surcharge is levied, which amounts to 5.5% of the capital gains tax.
3. Church Tax:
   • If the shareholder is subject to church tax, church tax is also levied on the investment income. The amount of church tax varies depending on the federal state and is either 8% or 9% of the capital gains tax.

Exemption Order and Savings Lump Sum

• Exemption Order:
  • Shareholders can submit an exemption order to their bank in order to claim the tax-free saver's allowance of currently EUR 1,000 (for single persons) or EUR 2,000 (for married couples). Within this amount, investment income remains tax-free.
• Savers' Lump Sum:
  • The saver's lump sum can be used to receive smaller dividend payments tax-free. If the total investment income is below this amount, no capital gains tax is payable.

Tax Treatment Abroad

• The taxation of dividends may vary in other countries. Many countries levy a withholding tax on dividends, which may be credited against the tax payable in Germany.
• It is advisable to check the respective double taxation agreements (DTA) between Germany and the company's country in order to avoid double taxation.

The dividend yield is a financial indicator that shows how much dividend a shareholder receives in relation to the current share price. It is expressed as a percentage and provides investors with an indication of how attractive a share is in terms of its dividend payments. The dividend yield helps investors to assess the return on their investment in relation to the dividends received.

Significance and Use

• Share Attractiveness: A higher dividend yield can indicate that a share is attractive to income-oriented investors. It means that the company is distributing a larger proportion of its profits to shareholders.
• Comparability: The dividend yield makes it possible to compare the earning power of different shares independently of the share price. This makes it easy for investors to determine which shares offer higher dividends in relation to their price.
• Investment Strategy: Dividend yields are particularly important for investors who invest in dividend strategies, e.g. dividend growth strategies or income strategies.

Factors that influence the Dividend Yield

• Amount of the Dividend: If a company increases its dividend, the dividend yield increases, provided the share price remains the same.
• Share Price: If the share price falls and the dividend remains the same, the dividend yield increases. Conversely, the dividend yield falls if the share price rises and the dividend remains unchanged.
• Company Profits: The ability of a company to pay and increase dividends depends on its profit situation.

A dividend strategy is an investment approach in which investors specifically invest in shares of companies that regularly pay dividends. The main goal of this strategy is to create a stable and often growing source of income while seeking capital growth. Here are the key aspects of a dividend strategy:

Core Principles of the Dividend Strategy

1. Focus on Dividends:
   • Investors specifically select shares in companies that regularly pay dividends. These companies generally have a solid financial position and stable profit streams.
2. Dividend Yield:
   • An important factor in selecting dividend stocks is the dividend yield, which indicates the ratio of the annual dividend to the current share price. A high dividend yield can indicate an attractive source of income.
3. Dividend Growth:
   • In addition to the current dividend payment, investors also look at dividend growth, which is the ability of a company to increase its dividend payments over time. Companies that continually increase their dividends often signal financial strength and good management.
4. Reinvestment:
   • Dividends received are often reinvested back into additional shares to take advantage of compound interest and maximize portfolio growth.

Advantages of a Dividend Strategy

1. Regular Income:
   • Dividends provide a steady source of income that is independent of fluctuations in the share price. This is particularly attractive for pensioners or investors who prefer regular distributions.
2. Stability and Security:
   • Companies that pay regular dividends are often established and financially strong companies. This stability can reduce the risk in the portfolio.
3. Inflation Protection:
   • Companies that regularly increase their dividends offer some protection against inflation, as dividend income can increase over time.

Typical Approaches within the Dividend Strategy

1. High Dividend Yield:
   • Investors look for stocks with particularly high dividend yields. This strategy can offer higher current income, but carries the risk that high dividends are based on the company's financial difficulties.
2. Dividend Growth Strategy:
   • Focus on companies that continually increase their dividend payments. These so-called “dividend aristocrats” or “dividend kings” have a long history of stable and growing dividend payments.
3. Diversification:
   • To minimize risk, investors diversify their portfolio across different industries and regions. This helps to cushion the specific risks of individual companies or sectors.

Implementation of a Dividend Strategy

1. Selecting the Right Stocks:
   • Analyzing companies' financial reports to ensure they have sufficient earnings and cash flow to pay and increase dividends.
2. Monitoring and Adjustment:
   • Regularly reviewing the portfolio to ensure that companies continue to pay stable or growing dividends. Adjustments may be necessary if a company cuts or suspends its dividend.
3. Use of Dividend ETFs:
   • One way to invest in a broad range of dividend stocks is to buy dividend ETFs (exchange-traded funds). These funds bundle together a large number of dividend stocks and thus offer simple diversification.