Dow vs. DAX: Where are the Best Dividends?

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In a recent post, I concluded that the blue-chip stocks on Germany's DAX index offered a slightly better value than those on the Dow (DJINDICES: ^DJI), strictly from a P/E standpoint. I did not, however, factor in one of the biggest appeals to a blue-chip investor: dividends.

There are lots of opportunities to invest in Dow dividends, from the generic SPDR Dow Jones Industrial Average ETF (NYSEMKT: DIA) to the iShares Dow Jones Select Dividend Index ETF (NYSEMKT: DVY). To get in on the DAX dividend action, though, an investor would have to buy ADR shares of the individual component companies themselves. Is it worth the extra effort?

At first glance

The DAX seems to have an advantage over the Dow when it comes to dividends. Here are the three stocks with the highest dividend yields on each index:

<table> <tbody> <tr> <td> Category</td> <td>Dow</td> <td>DAX</td> </tr> <tr> <td>Highest-yielding stock</td> <td><strong>AT&T</strong> <span class="ticker" data-id="205637">(NYSE: <a href="http://caps.fool.com/Ticker/T.aspx">T</a>)</span>, 5.11%</td> <td><strong>E.ON</strong> (utility), 7.74%</td> </tr> <tr> <td>Second-highest</td> <td><strong>Verizon</strong> <span class="ticker" data-id="206030">(NYSE: <a href="http://caps.fool.com/Ticker/VZ.aspx">VZ</a>)</span>, 4.24%</td> <td><strong>RWE</strong> (utility), 7.02%</td> </tr> <tr> <td>Third-highest</td> <td><strong>Intel</strong>, 4.11%</td> <td><strong>Deutsche Telekom, </strong>6.97%</td> </tr> </tbody> </table>

Yields reflect stock prices as of July 24, 2013.

The DAX's top dividend yields are a full two to three percentage points higher than those of the Dow!

The DAX also wins if we compare by sector. In telecommunications, for example, Deutsche Telekom's dividend is almost 7%. Compare that to the yields of the Dow's telecom stocks: AT&T (5.11%) and Verizon (4.24%). Compare it also to the yield of the SPDR Dow Jones Industrial Average ETF, at a recently-announced 1.59%, or the iShares Dow Jones Select Dividend Index ETF's 3.23%, and ask yourself whether there's any comparison.

Now, while the DAX's highest yields are higher than the Dow's, the reverse is also true. The DAX's lowest yields are lower:

<table> <tbody> <tr> <td> Category</td> <td>Dow</td> <td>DAX</td> </tr> <tr> <td>Lowest-yielding stock</td> <td><strong>Bank of America</strong>, 0.81%</td> <td>(tie) <strong>Commerzbank</strong>, 0%</td> </tr> <tr> <td>Second-lowest</td> <td><strong>American Express</strong>, 1.24%</td> <td>(tie) <strong>Lufthansa</strong>, 0% </td> </tr> <tr> <td>Third-lowest</td> <td><strong>Disney</strong>, 1.46%</td> <td>(tie) <strong>ThyssenKrupp</strong>, 0%</td> </tr> </tbody> </table>

Yields reflect stock prices as of July 24, 2013.

The solution here, of course, is to simply avoid buying shares of these companies if you're looking for a robust dividend. Of course, if you buy into an ETF, you don't have that luxury.

It is worth noting that while the iShares Dow Jones Select Dividend Index ETF has both "Dow Jones" and "Dividend" in its name, dividends are only one criterion it uses to select stocks, and many of its holdings aren't actually on the Dow! Be sure to double-check an ETF's holdings before buying in.

For DAX stocks, you'll probably be buying shares on the OTC market, where most of the DAX companies' ADRs are listed. Don't let the lack of an NYSE or NASDAQ ticker scare you, however. The companies on the DAX are very large and very stable (Deutsche Telekom, for example, owns the international giant T-Mobile). However, if the mere thought of buying OTC shares worries you, consider using a limit order.

Yields aren't everything

Perhaps even more important than the amount of a dividend is the quality of that dividend. After all, even a 20% dividend isn't of much value if it goes away and never returns. The iShares Dow Jones Select Dividend Index ETF takes this to heart by selecting companies defensively, eschewing many companies with high dividends or high payout ratios on the grounds that they are more likely to reduce their dividend in the future.

In general, Dow companies have been paying--and systematically increasing--their dividends for far longer than DAX companies (of course, there are some exceptions).  

Still, the best dividend performers on the DAX have also shown a commitment to offering dividends. As for increasing those dividends ... the record is mixed.

Top performer Deutsche Telekom, for example, currently sports a 6.97% dividend of 75 Eurocents ($0.89) per share, down slightly from its record 8.08% yield of 2010 and its record $1.23 cash payout of 2008, but certainly up from its 3 - 5% yield of the early 2000s. Its yield is still well in the top percentiles of both indices, but I'd factor a possible reduction into my plans, and do a quick check of any company's announced future dividend plans and analyst expectations before investing in them for their yield alone.

Remember, a high dividend yield can be an indicator that a stock's price has declined, or that investors are wary of bidding it up too high. In the case of the DAX stocks, this is probably a result of continuing fears about the future of the Eurozone. 

The bottom line

If dividend income is what you're after, the top DAX dividend payers currently offer a much higher yield than those on the Dow, or even a Dow ETF. If you believe, like I do, that the Eurozone crisis will blow over in a few years and leave Germany in a stable position, then top yielders Deutsche Telekom, E.ON, or RWE deserve a place in your diversified dividend portfolio alongside Dow stalwarts like AT&T and Intel.


John Bromels owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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