Swiss dividend pearls – continually sought, expertly found

Swiss dividend pearls – continually sought, expertly found

26 January 2018Reading time: 9 minutes

Dividends represent a more defensive source of returns, and one that is set to become increasingly important. And if dividend pearls are selected properly with an expert eye, this can lend additional stability to a portfolio. A new strategy shows how to turn the tried and tested into an innovative package.

Interest-based sources of income such as bonds and savings deposits have long since lost their shine. Taking inflation into account, it quickly becomes apparent that most of these investments tend to erode capital rather than growing it. Investors have therefore increasingly turned their attention to equities, and this has paid off handsomely in many cases of late thanks to the strong share price performance. However, amid the stock market euphoria, another source of income – one also associated with equities – has been allowed to slip into the background: dividends. Wrongly so say the experts, given that dividend strategies should play an important and lasting role in the construction of a portfolio. And there are good reasons why this should be the case.

Chart 1 Dividend strategies gaining in importance – especially among investors focusing on the long term

Health indicator with strong signal effect

Some have even dubbed dividends ‘the new interest’, and it is clear to see why if we take a more in-depth look. Companies have to be able to budget efficiently if they are to prevail in the market over the long term. They have to remain liquid, and maintain their discipline – for example when it comes to making payments to their shareholders. Companies with high dividend yields – known as dividend pearls – therefore mostly have healthy balance sheets coupled with stable, predictable cash flows. Stable or rising dividends are generally said to be a good indicator of how successfully a company is operating. And for the Equity Research team at Vontobel Investment Banking, the primary objective of a company is ultimately to create value. It does so if the return on the invested capital exceeds the capital costs. If their earnings rise, companies have more cash at their disposal, which they can then use to repay debt, make new investments, or make payments to their shareholders (in the form of dividends). There are even certain circumstances in which a company may opt to pay out more in dividends than it has generated from operations, and there are in fact examples of this in real life at present. Many insurance companies are facing higher risks – and as a result higher costs – owing to the increased occurrence of hurricanes. Nevertheless, insurers such as Swiss Re, Zurich and Baloise are looking to the future with confidence – and are set to pay attractive dividends. They can ‘afford’ to, and in so doing can avoid a greater evil: sending a negative signal to the market.

Dividends more stable than corporate earnings

The signal effect of dividends is an interesting aspect. It would be entirely possible for a company to adjust its payouts down as it likes, or even suspend them altogether, so as to improve its liquidity situation in times of declining earnings and bolster its balance sheet. However, many companies refrain from doing so, at least over the short term. The payout ratio is typically an important component of the financial strategy, given that the market generally reacts sensitively if dividends are suddenly reduced or not paid at all. This could in turn have the undesired effect of negative share price performance. Management teams therefore want to do their utmost to prevent any doubt arising with regard to their company’s viability going forward. Are dividend payments therefore essentially more stable than earnings? Although historical data are no guarantee of future developments, the ‘Capital Income: Dividends’ study published by Allianz Global Investors (AGI) in January 2017 presents some insights in this regard, taking the US market as an example. AGI conducted a long-term analysis of the members of the S&P 500® over the period from 1956 to mid-2016, and found that corporate earnings were indeed subject to much greater fluctuations than paid dividends. In the last ten years covered in particular, the annualized volatility of earnings (approximately 60%) was far higher than that of dividends (just under 6% p.a.). The dividend yield expresses the potential dividends paid out in relation to the current share price. It can also be interpreted as interest on the invested capital per share. Given that this is a ratio, higher payouts on the one hand and a (sharply) declining share price on the other can have a (massively) positive impact on the dividend yield, and the opposite is also the case.

Dividends make up the lion’s share of overall returns and smooth out share price volatility

However, there is another motive behind companies wanting to keep their dividend payments as sustainable as possible. Investors who are focused on the long term – and they are very attractive shareholders from a company’s perspective – tend to hold stocks with high dividend visibility for longer in their portfolios. They do so with a view to benefiting from potential advantages: in periods of uncertainty, high-dividend stocks can help lend more stability to the portfolio as a whole. Provided they occur reasonably regularly, the payment flows can smooth out the share price performance by lessening the impact of stronger price fluctuations. If price declines are slight to moderate, dividend payments can make a positive contribution and cushion the blow of modest losses to a certain extent. In the scenario of share prices rising only slightly, dividends tap into an additional source of income, the importance of which increases (in percentage terms) if the share price gains are modest. Looking back over the long term, we can see that dividends have accounted for a large part of the overall returns posted by shares, irrespective of the strength of the share price performance. This can again be seen in the long-term history of the S&P 500® Total Return, which shows share price performance with dividends factored in. Vontobel Equity Research has calculated both these components – share price performance and dividends – over the seven decades since 1940. It found that dividends generally accounted for a greater share of the total return in decades with low share price rises. In periods where the markets were booming and equity prices rising, but when earnings forecasts were also revised, the relative contribution of dividend payments may have decreased but remained significant nonetheless in absolute terms. On average, dividends made up 50% of the overall returns, with the lowest contribution coming in the 1990s, a decade marked by exceptionally high share price returns and culminating in the dotcom bubble. However, it should always be borne in mind that historical data are no guarantee of future developments.

Dividend yields at historic highs in Switzerland

If we return to the AGI study from 2017, this shows that particularly those investors focusing on European equities were able to enjoy high payouts. In the past, dividends have helped to stabilize the overall performance in years when share price trends were negative. According to AGI, Swiss companies are also generally known for reliable dividends. However, in 2015 and 2016 they had a strong Swiss franc to contend with. The CHF has weakened again in the meantime, and according to the Investors’ Outlook (January 2018) published by Vontobel Asset Management the overvaluation is likely to abate further going forward. To determine the past effect of the relative contribution of Swiss dividend yields on overall returns, the Equity Research team at Vontobel Investment Banking has deliberately chosen a rather unlikely historical scenario as the basis for its calculations: the high point of the broad-based Swiss Performance Index (SPI®) before the financial crisis in May 2007. This key index includes virtually all exchange-listed companies in Switzerland. An investment in the corresponding share price index – disregarding dividends – delivered an overall return of 2% over the 10-year period, with a positive trend taking hold only in September 2016. Taking dividends into account, the return was 39%. In other words, dividend payments (37%) made up almost the entire amount, with share price gains making only a very meagre contribution. If we look at the past twenty years, however, Swiss dividends would have delivered an excess return of 100%.

Swiss dividend pearls open up room for manoeuvre

According to Vontobel Investment Banking’s Equity Research team, the dividend component could be set to become increasingly important again following several years where the focus has been on share price returns. The stage has thus been set for a strategy concentrating exclusively on Swiss dividend pearls to enhance a portfolio. And not just because the headwinds of the overvalued CHF are likely to ease off. Swiss companies have also long since established themselves as market leaders in various areas, added to which they are well positioned globally and have for years been known for their exceptional capacity for innovation. Against this backdrop, potentially rising earnings and cash flows are likely to open up interesting scope for many Swiss companies with regard to dividend payments. However, as regards dividend expectations, Vontobel’s experts currently point to differences depending on company size. Chart 2 shows that the larger the company, the higher the expected dividend yield. It can therefore be worthwhile adopting a selective approach to stock selection using further criteria, rather than just pursuing the overarching objective of any dividend strategy, namely to profit from (high) dividend yields. Furthermore, investors should not focus their attention solely on the size of the dividend yields. It has often been the case in the past that investors have allowed themselves to be dazzled by excessively high dividend yields. However, sharp share price slumps can quickly ruin an attractive dividend strategy. One way of countering this would be to harness additional expertise when it comes to picking stocks. Another factor in favour of a sustainable strategic concept is that a dynamic investment is essentially more advantageous than a static one, since the former allows for timely reactions to events during the investment period, for example changes in equity ratings or dividend estimates.

Chart 2: Expected dividend yields vs historical average for Swiss companies

Defensive, dynamic and with interesting return prospects

When it comes to giving a Swiss focus to your portfolio, and availing yourself of expertise that can create value, it makes sense to profit directly from the market leader, namely the Swiss equity research experts at Vontobel Investment Banking. The team has built up an outstanding wealth of knowledge in Swiss stocks over many years. In the small & mid cap segment in particular, Vontobel’s analysts cover one of the broadest universes of any financial institution. We also lead the way when it comes to the results of that analysis. In 2017, Vontobel received the Extel award as ‘Leading Brokerage Firm’ for Swiss equities – for the seventh year running. The result of the Pan European Survey is regarded by the financial markets as the benchmark for excellence in investment banking and asset management across Europe. And we have also proven our worth in practice, with the Vontobel Swiss Research Basket launched at the beginning of 2016 having delivered excess returns (see box).

The Vontobel Swiss Smart Dividend Performance Index has now been launched to couple this outstanding expertise with an intelligent dividend strategy (and to pave the way for a potentially suitable investment). The dynamic concept combines a defensively focused dividend strategy with Vontobel’s award-winning analysis competence. Consideration is given to the stability of both the past dividend yields and forecasts based on analysis models developed in-house by Vontobel. Chart 3 shows the concept behind the Vontobel Swiss Smart Dividend Performance Index, which allows investors to invest via a simple tracker certificate. Taking a management fee into account, this makes it possible to participate virtually 1:1 in the performance of the index. With this product, investors can save themselves the expensive and tiresome work involved in analysing and evaluating stocks. The innovative dividend barometer is also adjusted automatically: with just a single transaction, you are invested every day in only those Swiss dividend pearls featured in the broad Vontobel research universe, and which also have a ‘Buy’ or ‘Hold’ recommendation from Vontobel’s experts. Stocks with a ‘Reduce’ rating are immediately removed.

Expertise in figures: Vontobel Swiss Research Basket

Since February 2016, investors have had the possibility of harnessing Vontobel’s multiple-award-winning expertise via a certificate tracking the dynamic Vontobel Swiss Research Basket. With this product, investors are at all times invested in Swiss stocks that have a ‘Buy’ rating from the market leader. The investment objective is to outperform the broad SPI®. For the period from its launch to the end of December 2017, the excess return stood at 25.4%. However, historical data are no guarantee of future developments.
  Thematic investments

The basket is compiled by Vontobel Equity Research on the basis of the current ‘Buy’ recommendations from Vontobel’s research / sell-side analysis team. Adjustments arise from changes made to the ratings / dividend data by the financial analysts or as a result of market developments. In preparing the financial analysis, both Vontobel and its analysts disclose any possible conflicts of interest; these may be viewed at any time at

Chart 3: The competence-based, dynamic dividend concept of the Vontobel Swiss Smart Dividend Performance Index

Monthly review of dividend history, floor and forecast

Source & illustration: Vontobel. Please note: The index is compiled by Vontobel Equity Research on the basis of the current ‘Buy’ and ‘Hold’ recommendations and in line with the dividend data (history, floor and forecast) provided by Vontobel’s research / sell-side analysis team. Adjustments arise from changes made to the ratings / dividend data by the financial analysts or as a result of market developments. In preparing the financial analysis, both Vontobel and its analysts disclose any possible conflicts of interest; these may be viewed at any time at

05/06/2023 02:27:49


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