Billions in payouts for investors: The best dividend stocks in the Dax

Highlights: The German economy has been weakening for months - but the large corporations in this country are once again delighting their investors with enormous profit distributions. Only a few stocks are really suitable for long-term dividend investment. One industry in particular stands out among the dividend aristocrats. The chemical company BASF pays one of the largest chunks of dividends of all DAX companies. The average dividend yield of the Dax was 4.4 percent at the beginning of this year. According to calculations by DZ Bank, the DAX dividend yield has fallen slightly towards 3.5 percent following the index's recent record highs.

An analysis of the distribution plans of all DAX companies shows: Only a few stocks are really suitable for long-term dividend investment. One industry in particular stands out among the dividend aristocrats.

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Stock traders:

Dividend hunters have to consider a few things when choosing stocks

Photo: ALEX DOMANSKI/ REUTERS

The news seems to contradict itself: The German economy has been weakening for months - but the large corporations in this country are once again delighting their investors with enormous profit distributions.

The economy as a whole was already bad last year, with Germany's gross domestic product (GDP) shrinking by 0.3 percent. After a decline of 0.3 percent in the fourth quarter of 2023, there is now a threat of recession. The prospects for 2024 as a whole are also not good: the OECD scaled back its growth forecast for German GDP to 0.3 percent. This means that Germany is behind France, Italy and Spain in the Eurozone and also behind other industrialized countries such as Great Britain and the USA. Of all the OECD member countries, only Argentina has weaker growth in the organization's outlook.

Germany is weakening, German corporations are paying record dividends

But what are the major German corporations doing? They continue to make billions in profits and also let their shareholders participate in this. According to DekaBank's forecast, the 40 companies listed in the leading index DAX will pay out a total of 53.1 billion euros in dividends this year. Things were looking even better recently: After Beiersdorf went even further with its intended distribution, DekaBank increased its forecast for the total payouts from DAX companies this year to 54.8 billion euros, which would have been a record high. But then Bayer surprised this week with the decision to drastically cut dividends: the pharmaceutical giant only wants to pay out the legally required minimum this year and the next two years. This would result in a dividend of 0.11 euros per share for 2023 - Bayer will pay out a total of 1.7 billion euros less this year than previously thought, according to DekaBank.

At 53.1 billion euros, the sum of total distributions in the Dax is still at the same level as the previous year. “The DAX companies are only partially dependent on the German economy,” says DekaBank capital market strategist

Joachim Schallmayer,

explaining the apparent contradiction to the poor overall economic situation. “The large corporations are internationally positioned and, for the most part, are still doing good business in the still prosperous global economy.”

To the delight of their shareholders. But which DAX stocks are particularly attractive from a dividend perspective?

Car manufacturers pay a quarter of the dividends in the Dax

Car manufacturers, for example, are particularly generous dividend payers. Volkswagen, BMW and Mercedes alone together contribute around a quarter of the total distribution of the DAX companies. Other big items come from Allianz Insurance, Deutsche Telekom and Siemens (see graphic above).

However, the absolute amount of the profit distribution is relatively uninteresting for investors - what is more important is the dividend yield, i.e. the ratio of the dividend to the share price. In this comparison, too, car manufacturers are far ahead, with dividend yields of currently up to 8 percent (see table).

For comparison: According to calculations by DekaBank, the average dividend yield of the Dax was 4.4 percent at the beginning of this year. According to the institute, it was noticeably above the long-term average of around 3.5 percent. According to calculations by DZ Bank, the DAX dividend yield has fallen slightly towards 3.5 percent following the index's recent rise to new record highs.

Can the group afford the high dividend?

But dividend hunters who base their purchasing decisions solely on the level of dividend yields are also making a mistake. There are other aspects that need to be taken into account: For example, is it perhaps not an attractive profit distribution, but rather an overly weak share price that is driving up returns? How reliable has the company been as a dividend payer in the past? Were the transfers regular and stable? Does the company even have enough profit to be able to afford the dividend paid (i.e. what is the payout ratio?)? And anyway: What are the business prospects, what can be expected from the company and its share price in the coming years? After all, dividend investments are usually designed for the long term.

BASF pays out of its substance

Anyone who subjects the dividend payers in the DAX to this test will receive a differentiated picture. Remarkable, for example: The chemical company BASF pays one of the largest chunks of dividends of all DAX companies. The dividend yield of around 7 percent also appears attractive.

However, a closer look shows that BASF is going through difficult times. As the only major profit-distributor in Germany's premier stock market league, the company is attacking its substance in order to please its investors. According to DekaBank, the payout ratio is currently around 110 percent, meaning the company is distributing more to investors than it has earned in profit.

Positive perspective required

“Individual years with such high payout ratios are not unusual for cyclical companies like BASF,” explains DekaBank expert Schallmayer. “But something like this cannot be sustained in the long term; we need the prospect of recovery.” And the prospects for the chemical industry, according to Schallmayer, are currently not the best.

Next example: the car manufacturers. Volkswagen, BMW, Mercedes, the Porsche companies and Daimler Truck almost automatically come into focus when it comes to dividends. Not only do they transfer some of the highest sums of all DAX companies. Rather, they also largely attract with relatively high dividend yields.

Falling prices drive up dividend yields

But even in this case, caution is advised. The dividend yields in the industry are not only so high because the corporations pay out particularly large amounts. Rather, the share prices of the major manufacturers have performed rather poorly in recent months - this has also contributed to the increase in returns. For example, both Volkswagen shares and Mercedes shares are down around 10 percent over the past twelve months. BMW achieved a performance of almost 5 percent plus over the same period. However, the Dax as a whole has increased by almost 10 percent in the same time.

The background to the weak performance is the uncertain outlook for Germany's auto industry. The industry is undergoing change worldwide, which is primarily related to the digitalization and electrification of vehicles. It still seems largely unclear how local providers will emerge from this change.

Car manufacturers are paying cautiously

“The question is whether the corporations can continue to afford their generous dividend payments given the turmoil in the auto industry,” says expert Schallmayer. However, he also draws attention to positive aspects: At the current price level, auto stocks appear to be comparatively cheaply valued, with price-earnings ratios in the single digits. The corporations are also comparatively cautious in their distributions in relation to their overall profits. According to DekaBank, Volkswagen and BMW, for example, only have payout ratios of around 30 percent, while Mercedes has a good 40 percent. For comparison: On average for the Dax, the ratio of profit distributions compared to total profit this year is 38.4 percent, according to DekaBank.

The keyword “uncertain prospects” leads directly to the next shaky candidate among the DAX dividend payers: Vonovia. Like many other companies in the leading index, Germany's largest landlord will increase its profit distribution this year, from 0.85 euros to 1.50 euros per share, according to the plan. The dividend yield of around 5 percent also appears attractive. But: The rise in interest rates over the past 1.5 years has plunged the real estate industry into a serious crisis, and the future appears uncertain even for big players like Vonovia.

Insurer with high continuity

So which stocks do dividend hunters stay in the leading German index? If you take all of the aspects mentioned into account, you will end up with two companies in particular: the insurers Allianz and Munich Re. The two companies have had reliable track records for profit distributions for years. Both Allianz and Munich Re have increased their dividends or at least kept them stable for more than ten years now. Both companies want to increase their distribution this year too.

When it comes to dividend yields, Allianz is in one of the top places in the DAX with around 5 percent. At Munich Re the value is a bit above 3 percent. And: Even the share prices of the two DAX insurers performed better last year than the leading index itself.

The basis for this is the insurance business, which is a steady business that - unlike the car or chemical industries, for example - remains largely unaffected by the cyclical swings in the economy. Most recently, in November 2023, Allianz and Munich Re once again reported billions in profits for the third quarter of last year. “The insurers have a stable, non-cyclical business,” says expert Schallmayer. “In the past, they have often pleased their shareholders not only through reliable dividend payments, but sometimes also through share buybacks.”

DZ Bank also counts a number of insurers among its “dividend aristocrats”, whose selection takes into account not only the dividend yield but also the sustainability of the dividends as well as other fundamental data and valuation indicators. According to DZ Bank, “dividend aristocrats” include Allianz and Munich Re as well as MDax-listed Talanx and Hannover Re.

The latest positive example from the insurance industry: A few days ago, the Swiss reinsurer Swiss Re announced a surprising jump in profits - and at the same time announced that it would increase its dividend.

The growth perspective also counts

If you want more price potential in addition to the prospect of constant dividend payments, you can take a look at SAP shares. This year alone, the software giant from Walldorf accounts for 5 percent of the total distributions of all 40 DAX companies, making it one of the largest profit returners. In addition, SAP was recently one of the best performers in the DAX, with a share price increase of almost 50 percent over the past twelve months. “Dividends are one thing, the growth prospects are another,” says expert Schallmayer. “From an investor’s perspective, it is important to find the right mix.” However, it is obvious that every price opportunity is accompanied by a correspondingly high risk of loss.

Schallmayer also sees good times for dividend hunters in the future. He expects the DAX companies' profits to rise again in 2024 and thus increasing distributions. He also expects share prices to continue rising - even though the DAX is already at record levels.

The investment professional points to the special position of the DAX as a performance index. This means: Unlike most other international stock indices, dividends are taken into account when calculating the German benchmark index. One consequence of this is that the index can theoretically even increase if all share prices remain stationary - thanks to the dividends.