Dividends

As a shareholder, you are a part-owner, and owners have a claim on the profit. At the end of a financial year, a company faces a choice. It can keep the profit and invest it, in new products or factories. Or it can pay part of it to its shareholders. That payment is the dividend. It is quoted per share. If a company pays a 2.40 euro dividend and you own one share, you receive 2.40 euros before tax.

German companies usually pay their dividend once a year. The management and supervisory boards propose an amount, and shareholders vote on it at the annual general meeting. Most of these meetings take place in spring, mainly between April and June. On the next business day the share trades without the dividend, which is called the ex-dividend date. By law, the dividend is normally due on the third business day after the meeting. A later date is allowed. It lands automatically in the cash account at your broker. You do not have to apply for anything.

To compare dividends, you set them against the share price. If a share costs 60 euros and pays a 2.40 euro dividend, the dividend yield is 4 percent. A high number looks tempting but means little on its own. Sometimes it is only high because the price has dropped sharply, perhaps because the business is struggling. And companies can cut or cancel their dividend at any time. There is no guarantee.

Young, fast-growing companies often pay no dividend at all. They put every euro back into growth. That is not worse, just different. You benefit when the company becomes more valuable and its share price rises. Older, established firms with steady business often pay out a large part of their profit. Whether a company pays a dividend says nothing about whether it is a good company. Many DAX companies, such as Allianz or Deutsche Telekom, are known for paying out regularly. Incidentally, the DAX itself is a total return index: it is calculated as if all dividends were reinvested straight away.

Dividends count as investment income. In Germany they are subject to a flat withholding tax of 25 percent plus solidarity surcharge, 26.375 percent in total, plus church tax if you pay it. Your first 1,000 euros of investment income a year are tax-free, though, or 2,000 euros for couples assessed jointly. To use that allowance, you file an exemption order, a Freistellungsauftrag, with your broker. Without one, a bank in Germany deducts the tax automatically.

You can spend it, on a nice evening out or a new pair of shoes. Or you can reinvest it and buy more shares. Then next year you receive dividends on more shares, and the year after a little more again. This effect has a name, and it is one of the most powerful in investing: compound interest. That is the next chapter.