Swiss Dividend Stocks in Focus: Quality Over Quantity

Following the recent decision by the Swiss National Bank to lower interest rates to zero, Swiss investors are once again facing a familiar challenge: how can stable and meaningful returns be generated in an environment where traditional savings instruments yield little or no income?

Against this backdrop, dividend strategies are emerging as a sustainable and attractive investment option, particularly for investors whose risk profiles allow for a higher equity allocation. This approach can also benefit those who wish to position their portfolios more strategically towards income-generating assets. Dividend-paying equities provide a tangible source of income, which is largely absent in bank deposits and government bonds under the current monetary conditions. As a result, investors can generate a steady cash flow while simultaneously maintaining the potential for capital appreciation. Furthermore, in a market environment characterized by heightened volatility, a focus on income-generating equity portfolios not only delivers dividend income but can also help mitigate the impact of increased fluctuations.

Robust dividend policy as a sign of stability

Many listed Swiss companies are committed to a progressive dividend policy. This means that short-term fluctuations in profit are not directly reflected in dividend payouts. Dividends tend to be less significantly reduced even if profits decline during an economic downturn, as companies try to avoid disappointing investors by reducing dividends. This commmitment is a strong sign of quality, as only companies with a sound and future-oriented business model can ensure such a distribution policy.

The role of dividends in long-term wealth accumulation

Dividends have always played a central role in overall returns from equity investments. Over the last 30 years, they have accounted for about half of the total return achieved in Swiss equities. The other half can be attributed to positive price developments, which are strongly correlated with companies' earnings growth.

Since 2015, the Swiss SMI Index has achieved a total return of approximately +33% excluding dividends. When accounting for dividends, especially a systematic reinvestment, the same index (SMI Index Total Return) achieved a total return of over +88%. The SPI Select Dividend 20 Index, which focuses specifically on highdividend stocks, performed even more strongly, delivering a return of over +54% over the same period – at almost same volatility. With systematic reinvestment of dividends, this index (SPI Select Dividend 20 Index Total Return) generated a total return exceeding 132%.

These figures clearly demonstrate that a dividend-focused strategy can significantly enhance equity returns, primarily through the systematic reinvestment of dividends.

Dividends make a significant contribution to the long-term overall performance of equities.

Diversification remains key – not the dividend yield

As with any fundamental investment principle, broad diversification remains critical in dividend strategies. Balance sheet strength and profitability of the company, as well as the sustainability and growth of its dividend policy, are more important than the absolute level of dividends paid in any given year. It is therefore essential not to select investments based solely on dividend yield. A well-constructed dividend strategy, such as that reflected by the aforementioned SPI Select Dividend 20 Index, takes into account not only the level of dividend yield but also criteria such as the sustainability of dividend payments and the financial stability of the companies.

Companies with (overly) high dividend yields can often be found in sectors that are up against structural challenges. These companies have fewer growth opportunities and are subject to margin pressure. As a result, the financial health of a company should be assessed carefully, including the capacity to continue dividend payments even in economically challenging times. A balanced dividend strategy should therefore be focused on broad diversification across sectors or geographic regions. This type of diversification minimizes risks and increases the odds of generating stable and sustainable returns.

One example of a well-constructed dividend strategy is the aforementioned SPI Select Dividend 20 Index, which comprises the 20 constituents of the Swiss Performance Index (SPI) offering the highest dividend yields. It takes into account not only the level of dividend yield but also criteria such as the sustainability of dividend payments and the financial stability of the companies.

Dividend yields of Swiss equities remain attractive, both in absolute terms as well as relative to Swiss franc bonds

With an average dividend yield of around 3%, Swiss dividend stocks remain attractive – for investors willing to take on higher equity exposure as well as for those seeking to align their portfolios with income-oriented strategies.

Historic dividend yield of the Swiss Performance Index (SPI).

Source: Bloomberg, smzh ag