Dividend Shares: For Sophisticated Investors - A Simple Analysis From The German DAX 30

Who buys shares thinks primarily on gains. But this is wrong! The dividend, a portion of the profits of a corporation paid to the shareholders, plays a big role. This can be illustrated best by comparing the so-called performance-Dax with the normal and more popular DAX 30: Within the DAX 30, no dividends of companies are included, unlike the performance Dax. Over the past twelve and a half turbulent years since the beginning of 2000, the difference is as much as 30 percent, which means that the performance Dax is at about the pre-crisis level, however, the Dax 30 lost about 30 percent of its value.

Who would even invest into the DivDax, an index of the best dividend stocks from the DAX 30 created by Deutsche Boerse Group, should rejoice today an overall performance of 70 percent.

A Closer Look

What does this mean for investors? Only observe shares with the highest dividend yield? Not at all. Of course, this approach has its appeal but it is not quite that simple, however. A high dividend yield (dividend compared to the price) is often a sign that a company has a big problem. Best example: Deutsche Telecom offering investors a dividend yield of more than seven percent. Too bad that it may pay more than they deserved. For the past year there was 70 cents per share, although the bottom line is only 66 cents remained.

Here is a short screen of the best yielding German Stocks from the Dividend Weekly 40/2012. The Dividend Weekly covers around 1000 companies wordwide and is subscribed here:

The higest German Dividend Yields From DAX (click to enlarge)

That is, the telecom exhausted their substance. Those who had bought the stock in 2000, sits on a pile of rubble now. A similar thing happened to the investors at E.on and RWE - the cash cows suddenly gave no more milk, because the political environment had changed dramatically by the energy revolution.

To be guided solely by the dividend yield is useless. It does not guarantee the permanent value of a share. Much more important than the dividend yield are sustainability and potential. An investor has to ask himself if the company wants to pay dividends in the coming years and how many reserves stock has to pay dividends in the near future. Prudent managers therefore never pour out all the profits, but retain a portion to pay reliably in the future dividend.