Right now they're doing the rounds again, the investment tips around dividends. As always at this time of year. But focusing on payouts or metrics like the dividend yield when investing is not a good idea.
„Dividend blockbusters“, „payout stars“ with „attractive consistency“: buzzwords like these are once again catching the eye more often in investment recommendations. From around March into May, most companies in Germany hold their annual general meeting. They then pay out the dividends. This regularly puts the topic in the spotlight.
That dividends can be an attractive source of income for investors is quite right. But: letting yourself be guided in your investing by criteria such as the consistency of payouts or the level of the dividend yield is highly speculative. And therefore unnecessarily risky.
Deceptive consistency
There are no guarantees whatsoever for dividends. How high they turn out and whether they are paid at all is decided anew again and again, looking back at the balance sheet. There are, admittedly, companies that have continuously paid a dividend over long periods and have even kept increasing it. These are then referred to as so-called dividend aristocrats. But even if a share belongs to this circle, it isn't necessarily a „blockbuster“.
Two examples: the beverage producer PepsiCo and the hygiene products manufacturer Kimberly-Clark have kept raising their dividend for 53 years. Looking back at the pure price performance of the past five years, however, both shares were in the red in mid-February. Including the dividend, the result isn't dazzling either. Over the whole period, PepsiCo posted a relatively meagre gain of around 13 percent and Kimberly-Clark of around 8 percent.
Some „dividend aristocrats“ have a better performance, some a worse one. The decisive point is: what investors can expect from individual shares in the future cannot be derived from the fact that they have paid dividends particularly consistently in the past.
The pitfalls of the dividend yield
Nor can the outlook be read off from the dividend yield. The dividend yield sets the dividend in relation to the price. But a high dividend yield is not the same as a „strong share“. Because the metric also rises when the price falls sharply while the dividend stays the same.
That dividends and dividend yields are not a reliable criterion for investment success is also shown by a comparison of the MSCI World with the corresponding stock market indices. The problem: if a company's outlook clouds over and this is reflected in weaker prices, the share nevertheless stays, at least for a while, in dividend indices and the corresponding products. Those, on the other hand, are missing many interesting shares with price potential. Growth companies in particular often prefer to invest their capital in expanding the business.
Better to diversify broadly
But not orienting your investment strategy around dividends in no way means doing without dividends. quirion's global ETF portfolio shows this. Among the roughly 8,000 shares in the global ETF portfolio are also many „dividend stars“. At the end of January, the portfolio's dividend yield averaged 2.6 percent - and thus higher than in the MSCI World, for example (1.69 percent).
In doing so, quirion's investment strategists don't pay special attention to dividends. Instead, they aim to take into account all the return factors that are relevant according to the current state of capital market research. In this way, with the global ETF portfolio, investors use the return opportunities of the world's equity markets without taking unnecessary risks.
Find out more about the advantages of broad diversification here.
