What are the characteristics of a dividend strategy?
Dividend stocks are considered a safe haven for investors, because they can generally rely on distributions even in volatile market phases. In correction phases, dividends can act as a buffer against price losses.
But not only that Dividend stocks act like a catalyst for stock market returns, as the following example illustrates: The German leading index DAX is usually presented as a so-called performance index. The DAX is also available as a price index. This does not take into account the dividends of the companies listed there. This has a significant impact on the price development: the DAX as a performance index is listed significantly higher than the price index – about twice as high.
This difference is due to the compound interest effect: The accumulation of distributions, the so-called compounding, is the recipe for success of investing in stocks. Unsurprisingly, successful investors like Warren Buffett do more than factor dividend levels into their investment decisions.
Dividend stocks are particularly attractive in times of ultra-low interest rates. Carsten Klude, chief economist at the private bank M. M. Warburg in Hamburg, goes one step further. In Manager Magazin he writes: “Dividends are the better interest. (…) In the Stoxx 600 alone, eleven out of nineteen sectors have a dividend yield of more than 3 percent. “
Incidentally, he is the inventor of the dividend strategy Warren Buffet’s tutor Benjamin Graham. The legendary investor invented value investing in the 1930s, in which the dividend yield, i.e. the dividend yield compared to the share price, played an important role in the valuation of shares. With his dividend strategy, he recommended investors at the time to buy the ten stocks with the highest dividend in the US leading index Dow Jones and to reallocate these regularly if something changed.
If you as an investor have a Didivend strategy à la Buffett and Graham then you don’t have to laboriously look for companies with high dividends and buy individual stocks. Dividend funds bundle dividend stocks and you can invest in the companies with the highest dividends with just one security.
Note: You can find out more about Warren Buffett’s investment strategies in our guide Investing like US star investor Warren Buffett.