How to Invest in Dividend Stocks

Alongside capital gains, stock dividends are a second source of returns on stock market investments. This guide provides the basic knowledge you need to begin using shareholder dividends in your investment strategy.

What are stock dividends?

A stock dividend is a portion of a company’s profit that is paid out to the company’s shareholders. Each shareholder receives a fixed dividend for each share that they own.

Next to voting rights, dividends are the most important privilege that comes with owning shares in a company. However, companies are not obligated to pay out dividends. With permission from shareholders, a company can use its profits for other purposes, such as investments. Some large companies like Amazon and Tesla, for example, do not pay out dividends to their shareholders.

How big are stock dividends?

Normally, a company’s executives decide how big the dividend should be, and make a recommendation at the company’s annual general meeting. In Switzerland, dividends are normally paid out once a year, but in the United States, dividends are often paid out on a quarterly basis.

The value of a stock, with regards to the dividends it yields, is indicated by the stock’s payout ratio. This figure shows how much of a company’s profit was paid out to its shareholders. For example, if a stock has a payout ratio of 25 percent, then one fourth of the company’s profits are paid out to shareholders. It is possible for a company to have a payout ratio above 100 percent. That can happen when a company pays out money from its financial reserves to its shareholders.

Another key figure, the dividend yield, shows how high a company’s dividends are in relation to its stock price. This figure is calculated by dividing the gross, per-share dividend by the current stock price, and then multiplying the result by 100.

Table 1: Stocks included in the Swiss Market Index (SMI), sorted by dividend yield

SMI stock	Stock price	Gross dividend in 2022	Payout ratio	Dividend yield
Kühne + Nagel	CHF 242.50	CHF 14	62.82%	5.77%
Swiss Re	CHF 99.26	CHF 5.69	391.94%	5.73%
Zurich Insurance Group	CHF 437.30	CHF 24	84.53%	5.49%
Swiss Life	CHF 589.20	CHF 30	60.52%	5.09%
Swisscom	CHF 513.80	CHF 22	71.16%	4.28%
Holcim	CHF 58.94	CHF 2.50	42.97%	4.24%
Novartis	CHF 83.34	CHF 3.20	104.31%	3.84%
Roche	CHF 252.80	CHF 9.50	60.69%	3.76%
Partners Group	CHF 1007.50	CHF 37	95.45%	3.67%
Nestlé	CHF 99.75	CHF 2.95	84.46%	2.96%
ABB	CHF 31.12	CHF 0.84	69.06%	2.70%
Geberit	CHF 472.90	CHF 12.60	59.99%	2.66%
UBS	CHF 21.98	CHF 0.50	22.01%	2.27%
Richemont	CHF 112.45	CHF 2.50	653.99%	2.22%
Givaudan	CHF 3057	CHF 67	72.08%	2.19%
Sonova	CHF 225.90	CHF 4.60	42.33%	2.04%
Logitech	CHF 71.46	CHF 1.06	52.11%	1.48%
Sika	CHF 227.80	CHF 3.20	42.35%	1.40%
Lonza	CHF 329.10	CHF 3.50	21.40%	1.06%
Alcon	CHF 67.02	CHF 0.21	34.63%	0.31%

Stock prices are based on the closing prices on November 3, 2023, as per investing.com. The source for payout ratios is fuw.ch.

How are dividends from Swiss stocks taxed?

Dividends from Swiss stocks are generally subject to Swiss income taxes, and an anticipatory tax is deducted to ensure this. You have to declare your gross dividends along with your other taxable income in your tax returns. The 35 percent anticipatory tax is refunded after you correctly declare the stock in the securities declaration form of your Swiss tax return.

 

How are dividends from foreign stocks taxed?

Dividends from foreign stocks are typically subject to a withholding tax in the country where the company is domiciled. Whether or not you can reclaim foreign withholding taxes depends on whether or not Switzerland has a relevant double taxation agreement (DTA) with that country. You can find more information in the moneyland.ch guide to taxes on investment profits.

How important are dividends when selecting stocks?

Dividends are, along with possible capital gains, part of the return that you earn from a stock investment. When a company pays out dividends to investors, it sends a positive signal. It normally means that the company is making a profit. Additionally, dividends provide a flow of income that can be reinvested. Dividends can have a motivational effect.

However, the amount of focus you should place on dividends depends primarily on your investment strategy. In a dividend-based strategy, the reliability and size of dividends are the most important criteria. But if your aim is to profit from capital gains in the value of stocks, then your focus should be the potential for growth in the industry sector, and for the company itself. You can learn more in the moneyland.ch guide to investment strategies.

An extraordinarily high dividend can be a warning signal. A company may pay out very high dividends to its shareholders when the value of its stock is in decline, or if it expects a loss in value. By offering high dividends, the company hopes to attract or retain investors. These high dividend payments normally are not sustainable. For example, if the price of a stock with a 3 percent dividend yield were to fall by 80 percent, the dividend yield would shoot up to 15 percent, but the actual dividend per share would remain exactly the same.

What are dividend aristocrats?

The term dividend aristocrats refers to exchange-listed companies that have consistently increased the size of their dividends for 25 consecutive years. According to a report by Swiss bank Vontobel, there are 15 Swiss stocks that fall into the category of dividend aristocrats. There are also foreign companies, such as Coca Cola and IBM, that have this classification.

Table 2: Swiss dividend aristocrats

Company	Industry sector	Domicile	ISIN
Also	Information technology	Emmen	CH0024590272
DKSH	Manufactured goods, services	Zürich	CH0126673539
Geberit	Sanitation technology	Rapperswil-Jona	CH0030170408
Givaudan	Chemicals	Vernier	CH0010645932
Interroll	Machines, tools	Sant’Antonino	CH0006372897
Logitech	Computer and networking hardware	Lausanne	CH0025751329
Nestlé	Food processing	Vevey	CH0038863350
Novartis	Pharmaceuticals	Basel	CH0012005267
Orior	Food processing	Zurich	CH0111677362
Partners Group	Finance, holding company	Baar	CH0024608827
Roche	Pharmaceuticals	Basel	CH0012032048
Sika	Chemicals	Baar	CH0418792922
Swiss Life	Insurance	Zurich	CH0014852781
Temenos*	Information technology	Geneva	CH0012453913
Zug Estates	Real estate	Zug	CH0148052126

*Strictly speaking, this company does not yet fulfill the requirements to be classified as a dividend aristocrat, as it has only paid out dividends since 2012. Sources: Cash.ch, Vontobel. Date: October 27, 2023.

Dividends that remain stable or even get bigger over long periods of time indicate that the company’s business model is sound, as the company remained profitable even during periods of crisis. But it is important to keep in mind that companies are classified as dividend aristocrats based on past dividends. While the chances of a positive trend continuing are high, there is no sure way to know how things will develop in the future.

Are there any ETFs that specialize in stock dividends?

If you want to focus your investment strategy on stock dividends, then exchange-traded funds (ETFs) that specialize in dividends are one way to do it. The cost of using ETFs is low compared to the cost of using actively-managed mutual funds.

Table 3: Examples of stock dividend ETFs, ranked based on their total expense ratios (TERs)

Exchange-traded fund (ETF)	ISIN	Currency	Domicile	TER	Dividends
iShares Swiss Dividend ETF	CH0237935637	CHF	Switzerland	0.15%	Distributed
WisdomTree Eurozone Quality Dividend Growth UCITS ETF EUR Acc	IE00BZ56TQ67	EUR	Ireland	0.29%	Accrued
Franklin Global Quality Dividend UCITS ETF	IE00BF2B0M76	USD	Ireland	0.30%	Distributed
UBS ETF (IE) S&P Dividend Aristocrats ESG UCITS ETF (USD) A-dis	IE00BMP3HG27	USD	Ireland	0.30%	Distributed
SPDR S&P Euro Dividend Aristocrats UCITS ETF	IE00B5M1WJ87	EUR	Ireland	0.30%	Distributed
SPDR S&P US Dividend Aristocrats UCITS ETF	IE00B6YX5D40	USD	Ireland	0.35%	Distributed
VanEck Morningstar Developed Markets Dividend Leaders UCITS ETF	NL0011683594	EUR	Netherlands	0.38%	Distributed
Fidelity Global Quality Income UCITS ETF	IE00BYXVGZ48	USD	Ireland	0.40%	Distributed
Fidelity Global Quality Income UCITS ETF (CHF Hedged)	IE00BMG8GR03	CHF	Ireland	0.45%	Distributed
Lyxor SG Global Quality Income NTR UCITS ETF - Dist	LU0832436512	EUR	Luxembourg	0.45%	Distributed
Global X SuperDividend UCITS ETF USD Distributing	IE00077FRP95	USD	Ireland	0.45%	Distributed
iShares STOXX Global Select Dividend 100 UCITS ETF (DE)	DE000A0F5UH1	EUR	Germany	0.46%	Distributed
SPDR S&P Pan Asia Dividend Aristocrats UCITS ETF	IE00B9KNR336	USD	Ireland	0.55%	Distributed

 

The ETFs listed in Table 3 all use full physical replication. That ensures that the fund actually holds the stocks, rather than using swaps. Physically replicating ETFs are considered safer than ETFs that replicate stock performance synthetically. From a tax perspective, it is advantageous to use an ETF that is domiciled either in Switzerland, Ireland, or Luxembourg.

Distributing or accruing?

Some ETFs do not distribute, or pay out, the dividends from the stocks they hold to you. Instead, the dividends are accrued, meaning the fund keeps and reinvests them. Other ETFs distribute the dividends. Distributed dividends are paid out to your stock brokerage account.

Accruing funds are suitable if you expect the stocks that the fund invests in to grow in value. But if you want to invest with the goal of earning an income from your investments, then you should use distributing funds.  

More on this topic:
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How investment profits are taxed in Switzerland
How to invest money in Switzerland
Dividends in kind from Swiss stocks