What characterizes a dividend strategy?
Dividend stocks are considered a safe haven for investors because they can usually rely on distributions even in volatile market phases. In correction phases, dividends can be 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 leading German 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 clear effect 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 in equity investments. So it’s not surprising that 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 MM Warburg in Hamburg, goes one step further. In the manager magazine he writes in 2018: “Dividends are the better interest rates. (…) In the Stoxx 600 alone, eleven out of nineteen sectors have a dividend yield of more than 3 percent.”
Incidentally, Warren Buffett’s teacher Benjamin Graham is considered the inventor of the dividend strategy. The legendary investor invented value investing in the 1930s, in which dividend yield, i.e. dividend income compared to the share price, played an important role in stock valuation. With his dividend strategy, he recommended investors to buy the ten highest-dividend stocks in the US Dow Jones index and to reallocate them regularly when something changes.
If you, as an investor, want to implement a dividend strategy à la Buffett and Graham, then you don’t have to search for high-dividend companies and buy individual stocks. Dividend funds pool dividend stocks and you can invest in just one security at a time in the top-paying companies.
Note: You can find out more about Warren Buffett’s investment strategies in our guide Investing like US star investor Warren Buffett.