Chasing dividends

04. März 2005 By Anke Bryson

At a time when neither bonds nor stocks seem to promise high-flying returns, German investors have rediscovered the old virtues of companies that at least offer solid dividend payouts. With the DivDax, the Frankfurt Stock Exchange operator now offers these investors a barometer that could serve to guide their investment behavior by tracking the development of dividend-paying companies. The latest addition to Deutsche Börse's Dax index family contains the 15 stocks included in Germany's leading index that offer the highest dividend yield.

The launching of the index this week coincided with fresh signs that this year promises to be a very good year for dividend hunters. Most of Germany's big blue chips plan to increase their dividend payouts. Analysts predict total dividends of €14.6 billion for the 30 Dax companies, an increase of 40 percent from last year, as Germany's big blue chips share the rewards of restructuring, rationalization and debt reduction with their shareholders. Apparently, companies have more liquidity than they need to finance their growth.

While the dividend yields of some companies exceed the return on German government bonds with longer maturities, which currently bring less than 4 percent, German dividend yields are actually relatively low in international comparison. Just under one-third of the Dax companies boast a dividend yield of 3 percent or more, compared to well over half of all DJ Euro Stoxx companies.

Deutsche Börse's new index is similar to the well known “dogs of the Dow.“ Here, investors buy the 10 stocks offering the highest dividend yield in the U.S. Dow Jones Industrial Average index. Once a year, they clean up their portfolio to ensure that they always keep the top 10 stocks. This strategy has earned investors average gains of about 13 percent over the past 10 years.

Investors will be able to invest in the Div-Dax through index certificates, warrants and funds. Meanwhile, analysts warn the dividend hunters to be cautious. Investors need to pay close heed to such factors as the past continuity of dividend payouts and whether the company paid its dividend out of operating income or had to tap its resources to please shareholders.

Deutsche Telekom, for example, will pay its shareholders 62 cents per share this year - a dividend yield of nearly 4 percent - but for years disbursed no earnings at all. The first 15 members of the DivDax are BASF, Bayer, Daimler Chrysler, Deutsche Bank, Deutsche Post, E.ON, Henkel, Linde, MAN, Metro, RWE, Schering, Thyssen Krupp, TUI and Volkswagen.

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