The Dividend Strategy: Pros, Cons, and Key Figures to Consider

If you are currently considering investing in stocks, the dividend strategy could be an interesting option for you. This strategy is about investing in companies that have their… Distribute profits to shareholders in the form of dividends. This is usually done as a percentage of the share value, so higher investments also mean higher dividend payments. However, you should also consider the risks.

Important key figures in the dividend strategy

1. Dividend yield: The dividend yield is the ratio between the annual dividend per share and the current share price. It shows how much return you will receive on your investment. A higher dividend yield is usually more attractive, but should be viewed with caution as it may indicate problems within the company.
2. Dividend growth rate: This metric shows how much dividends have increased over time. Stable or growing dividend growth is a good sign for long-term investors.
3. Payout ratio: The payout ratio shows the percentage of profits a company uses for dividends. A low payout ratio may indicate that the company is investing in expansion or debt repayment.

Advantages and disadvantages of the dividend strategy:

At first glance, it sounds very lucrative for shareholders to receive a dividend in addition to the share value. But you should also keep in mind that by distributing profits, the company can invest less in research and development and as a result the company’s growth may be lower.

Advantages:

• Stable source of income: Dividends provide a regular source of income
• Long-term and stable returns: Companies that pay dividends tend to produce stable returns over the long term and increase dividends over time.
• Protection against inflation: Dividends can help protect your money’s purchasing power against inflation.

Disadvantages:

• Price volatility: Stock prices can fluctuate significantly, which can lead to uncertainty about the return on capital.
• No guarantee or planning: Payment of dividends is not guaranteed. Companies can reduce or eliminate their dividends if they are experiencing financial difficulties.
• Tax implications: Dividends may be taxable and reduce returns.

What dividend yield can you expect?

The expected dividend yield depends on various factors. On average, large established companies tend to offer lower but more stable dividend yields, while smaller growth companies can offer higher but more volatile returns. The average dividend yield in the DAX is currently just under 3.5%. It is advisable to diversify your portfolio to spread risk and achieve a reasonable return.

Don’t rely exclusively on stocks that pay dividends

The dividend strategy can be quite worthwhile, especially for long-term investors looking for stable sources of income. However, it is important not to look at the dividend yield in isolation, but in conjunction with other metrics and factors. If you plan to invest in a dividend stock anyway, the distribution of profits in the form of a dividend is an additional plus. You should not make your investment decision dependent on the dividend. These share prices can fluctuate very strongly, so that no dividend can be guaranteed over a longer period of time. A balanced investment strategy that also includes other assets such as bonds and diversification can help minimize risk and achieve long-term financial goals. Before investing in dividend stocks, it is advisable to seek professional advice and consider your individual risk tolerance.