Dividends are one of my very favorite investing concepts. The reason is that it’s just so simple: When the company you own makes money, they give some of that profit to you. How can you not love that?
And dividends aren’t just for the impatient investors among us. In fact, being a patient dividend investor can pay off in a big way. In 2007, U.S. investing experts Tweedy, Browne published a paper titled “The High Dividend Yield Return Advantage”. At the outset of the paper, the group answered the question “Why dividends?” directly, if not a bit blandly, with:
There is an abundance of empirical evidence which suggests that portfolios consisting of higher dividend yielding equity securities can produce returns that are attractive relative to lower yielding portfolios and to overall stock market returns over long measurement periods.
Offering some far less bland evidence of the power of dividends, Tweedy went on to cite a 2002 paper that showed that over a 101 year time-frame from 1900 to 2000, a “market-oriented portfolio” with reinvested dividends “would have generated nearly 85 times the wealth generated by the same portfolio relying solely on capital gains.” [emphasis mine]
It shouldn’t be all that surprising, then, that I’d want to take a look at the highest-yielding stocks in the DAX. Here they are:
|Company||Dividend Yield||Payout Ratio|
|E.ON SE (WKN:ENAG99) (ETR: EOAN) (FRA: EOAN)||4.49%||NM|
|Münchener Rückversicherungs-Gesellschaft AG (WKN:843002) (ETR: MUV2) (FRA: MUV2)||4.46%||34.6%|
|RWE AG (WKN:703712) (ETR:RWE) (FRA:RWE)||4.05%||NM|
|BASF SE (WKN:BASF11) (ETR:BAS) (FRA:BAS)||4.01%||50%|
|Allianz SE (WKN:840400) (ETR:ALV) (FRA:ALV)||3.96%||38.4%|
Source: S&P Capital IQ. As of 1/6/15.
In the table above, I’ve provided both the dividend yield, along with the payout ratio. The importance of the payout ratio is that it tells us what percentage of the company’s profit was used to pay the dividend. If a company is at or near 100%, investors may need to question the stability – or at least the growth potential – of the dividend. If the payout ratio is low, it may mean that the company has room to continue growing its payout.
Neither E.ON nor RWE have payout ratios listed because neither company was profitable over the past 12 months.
Are these big dividends worth buying?
Because a stock’s dividend yield rises as the stock price falls, stocks often end up with big dividend yields because the stock market is concerned about the company. So when deciding which high-yield stocks to buy, it’s particularly important to make sure you’re not buying a dud company with an unsustainable payout.
With that in mind, I wouldn’t necessarily call either E.ON or RWE dud companies, but their high dividends don’t overcome my lack of excitement about the companies. Both companies have been the subject of larger industry pressures – both broad changes such as renewables and more recent political developments. And investors in both companies have seen deteriorating results and falling dividend payouts. There may be other investors out there that see an exciting future that I’m missing, but lousy results in recent years combined with a generally highly-regulated and low-growth industry make it tough for me to want to invest in either company.
BASF has been the victim of the slow growth in the Euro region and the broad expectations that the sluggishness will continue. The chemicals industry is a pro-cyclical one – that is, it does well when the economy does well, and struggles when the economy slows down. But BASF holds more interest for me than either E.ON or RWE. I have more confidence that BASF’s business will not only endure, but be able to tap more exciting growth markets, particularly in Asia. Dividends are great for a situation like this because you get paid while you wait around for better times.
Last but not least, we have Allianz and Munich Re. Both businesses here face challenges as the insurance market has continued to be flooded with capital, while investment returns on fixed-income investments have been at rock-bottom levels – a terrible combination for an insurer. Allianz has faced the additional challenge of a struggling asset management business (PIMCO) and the loss of the investor that was once the face of that business (Bill Gross). But I don’t think either company or dividend is seriously threatened.
If I had to choose one…
It’d be an easy choice for me: Munich Re. As I noted above, there are real challenges for this reinsurance giant. And the mere fact that Munich Re is so big also makes it more difficult to grow quickly. But in the coming years, as interest rates begin to rise from their current ridiculously-low levels, Munich Re should find some more breathing room.
In the meantime, there are advantages to being a large player in a tough market – particularly a large player that has an explicit focus on being creative and leveraging the knowledge across the entire business.
Insurers, however, don’t tend to be hugely exciting investments. Investors don’t tend to see the big year-to-year growth that might come from a budding social network company. But over long periods of time, the industry has produced impressive winners for long-term shareholders.
Bis zu 130 Mrd. US-Dollar investiert Investorenlegende Warren Buffett in nur ein einziges Unternehmen. Das zeugt von riesigem Vertrauen in das Zukunftspotential.
Buffett hat so einige Mega-Milliardeninvestments in seinem Portfolio. Wir haben sie näher analysiert, und angesehen, inwieweit sie sich zum Nachahmen eignen.
Matt Koppenheffer and The Motley Fool own none of the above-mentioned stocks.