Thematic Focus: Dividend yield as an investment argument? Dividend yield is only one of many stock selection criteria. However, dividend payouts assume more importance when stock markets suffer from lacklustre performance, as they are likely to do in 2010

In its first Thematic Focus of the year, Bank Sarasin therefore takes a closer look at dividends, with the publication of a new research paper “The importance of dividend yield”. Here Sarasin highlights the various dividend payment alternatives, including Cash or Title Options, and describes the main advantages and drawbacks. At the same time, recommendations are provided for the most attractive Swiss and international equities. These include Zurich FS, Swisscom, Mobimo, Credit Suisse, Valora and Nestlé in Switzerland, as well Deutsche Telekom, E.On, Munic Re, GDF Suez, Total and Allianz in Europe.
When making an investment decision, consideration has to be given to a number of different components, such as the company’s growth prospects or capital expenditure requirements. However, success or failure ultimately depends on the total return on the equity investment. When market conditions are normal, capital growth (in the form of share price gains) makes the biggest contribution, while dividends play a secondary role. But Bank Sarasin expects 2010 to be a period of subdued growth in stock markets. It predicts that the Swiss Market Index will finish the year at (around) 6600 points, just one percent higher than its level at the end of 2009. The dividend payout will thus automatically become more important, because its relative contribution to the overall return on investment will increase. As far as dividend payouts for 2009 are concerned, Sarasin expects that the market consensus forecasts will be met in the majority of cases, in contrast to the previous year.

All investment criteria must be taken into account “A focus on dividend yield alone will not pay off. This fact is supported, for example, by the result of the “Dogs of the Dow” investment strategy, which has achieved below-average returns over the last 15 years when compared with the Dow Jones Index. If you want to put your money into stocks with a high dividend yield, we therefore recommend that you also take into account the other investment criteria. Our “dividend recommendations” are, as the name suggests, those stocks which boast a high dividend yield while at the same time warranting a “Buy” rating from us.” – Patrick Hasenböhler, Sarasin Research

Form of capital repayment has tax repercussions
There are several ways for a company to return some of its profits to shareholders. Paying dividends is one of them. But although dividends tend to be popular with private investors, they are often unattractive from a fiscal perspective. Since current Swiss tax law is based on the par value principle, dividends are classed as income and attract income tax. Share buybacks offer an alternative form of capital repayment which is becoming increasingly common. These are best suited to institutional investors, but are unattractive as a form of direct participation for private investors, for fiscal reasons.
COTOs: an attractive way to distribute profits
The third and most interesting alternative for private investors is a par value repayment, which in essence is no different from a dividend payout. Since in formal terms this constitutes the repayment of capital which was paid in previously, it remains tax-free for private individuals whose domicile for tax purposes is Switzerland. With most companies, however, a normal dividend payment is worth more than the existing par value, which makes it impossible to put into practice. When the Corporate Tax Reform II comes into force in 2011 and there is a change from the par value to the net present value principle, more companies will be able to make tax-free repayments to their shareholders. Then it will be possible for any payments made in addition to the par value, for example those made in connection with capital increases, to be paid out to shareholders free of tax.
When combined with par value reductions, Cash or Title Options (COTOs) are an attractive instrument, as they allow the shareholder to choose whether to subscribe to new shares, sell the COTO on the stock exchange or claim the fixed cash payment. No tax is payable on the issue of COTOs, and further tax incentives will be introduced with the reform in 2011. Bank Sarasin itself issued COTOs in 2009 instead of paying a dividend, and more than 99.9% of them were used to subscribe to new shares.

Dividend yield as an investment argument: Bank Sarasin’s Buy recommendations The most promising shares are those of companies with a high dividend payout combined with a ‘Buy’ rating. In Switzerland, these are mainly financial and real estate companies. Bank Sarasin recommends buying the following shares: Zurich Financial Services Swisscom Credit Suisse Valora Nestlé The most suitable shares in private investors are those which distribute their profits in the form of a par value reduction, which is the best solution for tax purposes. These include: Mobimo Swiss Prime Site PSP Swiss Property In Bank Sarasin’s universe of international equities, Deutsche Telekom is the share with a Buy rating which promises the highest dividend yield. Other recommended stocks are: E.On Munic Re GDF Suez Total Allianz

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JB has successfully completed the acquisition of ING Bank (Switzerland) Ltd. that was announced in October 2009. The integration of the new business units is progressing as planned