Erste AM: Dividend season ahead

The dividend season is closing in. In 2016, the companies listed in the German equity index (DAX) distributed more than EUR 29bn worth of dividends to their investors. Experts are also optimistic about the ongoing season. However, many investors still focus on capital gains in their equity investments and forget about the upsides of dividends. – Wrongly, as Harald Egger, Chief Analyst with Erste Asset Management, establishes. The expert explains why dividend income plays an important role especially for investors with a long-term horizon.

Mr. Egger, dividend-paying equities tend to come with the reputation of being bond substitutes. Why are they interesting in the long run as well?

Egger: Yes, that’s true – many investors do indeed regroup their assets from bonds to then more attractive equities in times of falling bond yields. And given the combination of falling or low yields for government bonds and at the same time rising commodity prices, we are currently faced with an optimal environment for these securities. Experience teaches us that equities with high dividends outperform the overall market in such a scenario. In the long run, every investor should therefore be aware of the fact that the periods of outperformance are balanced by periods of underperformance. For a long-term analysis, it makes sense to have a look at the share of dividends in terms of total return of equity investments.

Can you illustrate this quantitatively?

Egger: Let’s take the MSCI World index as benchmark for the overall market: here, dividend payouts have accounted for an average of 25% of total return in recent years. While the index has recorded an average gain of 6.7% per year (adjusted for currency fluctuations) exclusive of dividends, the performance inclusive of dividends has been an annual 8.9% (and this already includes a withholding tax of 27.5% for countries such as Austria). In the UK and Australia the share of dividends in terms of total return is even higher – up to 35%.

What other benefits can investors reap who focus on high dividends payouts?

Egger: Investors with focus on dividends can benefit from the compound interest effect. Let’s assume an investor has a long-term horizon. He holds his equity portfolio for a period of 30 years and re-invests his dividend in the equity market. His total return at the end will be twice as high as without dividends. Also, dividends offer protection against inflation, which has recently picked up again. In contrast to bond coupons, dividends will rise continuously over time. The MSCI World companies increase their dividends by an average 5.9% per year. Over a period of ten years, this is tantamount to a tenfold increase. Since the most recent financial crisis, dividends have risen even more strongly than inflation.



Harald Egger, Chef-Analyst Erste Asset Management


Erste Asset Management GmbH ( coordinates, and is responsible for, the asset management activities (asset management based on investment funds and portfolio solutions) within Erste Group Bank AG. At its locations in Aus-tria, Germany, Croatia, Romania, Slovakia, the Czech Republic, and Hungary, it manages assets of about EUR 57.2bn (as of December 2016).


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