How DAX investors benefit from the “dividend trick”.

Things could hardly be better for the DAX on its 35th birthday. This is also due to a “dividend trick”. Private investors can benefit from this – if they pay attention to a few things.

Let’s start with a little guessing game: Which index doesn’t belong in this series – Dow Jones, Nasdaq, DAX or Nikkei? It is of course the DAX that is stepping out of line. The German share index, which recently reached a new record high of 16,427 points and is now celebrating its 35th birthday on July 1st.

In contrast to the other major international stock market indices, the DAX is a so-called performance or total return index. This may sound technical at first, but it simply means that the company’s dividend payments are included in its calculation.

Built-in compound interest effect in the performance DAX

If, for example, the DAX group Allianz transfers its dividend to its shareholders once a year, it is assumed that this dividend would be immediately reinvested in Allianz shares. Same game for the other 39 stocks in the German Stock Index.

But what does that mean for private investors who are invested in the DAX via an ETF, for example? This reinvestment of the dividends ensures a built-in interest-interest effect in the DAX. This means that the performance DAX can theoretically even rise when prices fall. Critics therefore also speak of the “Botox-DAX” or “tuned DAX”.

“Botox DAX” versus “real DAX”

A comparison with the DAX, which is much less well-known to many investors because it is almost completely absent from the media, shows that dividends are a key return driver in the DAX. The price DAX is calculated in analogy to international indices such as Dow Jones or Nasdaq as a pure price index, so it only reflects the price fluctuations of the DAX shares – dividends are left out. This in turn has massive consequences for returns.

Those who put their money in the performance DAX were always able to achieve a significant increase in returns compared to the price DAX over various periods of time. In the past 20 years, for example, the performance DAX has delighted investors with a return of 386 percent. For comparison: In the same period, the DAX only achieved a return of 167 percent.

How can investors trade the DAX?

Without dividends as a return driver, the hunt for superlatives is naturally difficult: while the performance DAX set a new record of 16,427 points two weeks ago, the price DAX did not want to succeed in this feat. Here the record high (6883 points) dates from the end of 2021, the DAX is currently around six percent below it.

The bottom line is that there is a lot to be said for private investors to invest in the performance DAX if they want to secure an extra return. But how exactly can you go about doing this? The fact is: Strictly speaking, the index itself is not tradable. In order to trade the DAX, investors need a derivative financial instrument, such as a fund, a certificate or an ETF (index fund).

What investors should look out for when investing in the DAX

But no matter how investors invest in the DAX: It is important to keep a close eye on two factors – the costs and the investment period. It is important to keep the costs as low as possible, as they eat into the return. With ETF comparison portals on the Internet, there is always the possibility of sorting the offers according to the TER, i.e. the total expense ratio. This indicates the annual costs as a percentage. The currently cheapest DAX ETF has a TER of 0.08 percent per year.

It also makes sense to invest in an accumulating ETF, here the DAX dividends are directly reinvested. If, on the other hand, you choose the distributing variant, where the dividends are paid out about once a year, you do without the extra return described.

DAX investments – the longer, the better

With regard to the investment period, the general rule applies: the longer, the better. A look at this also shows that Yield triangle of Deutsches Aktieninstitut (DAI). It is true that the inclusion of dividends makes the DAX a little more independent of the price caprioles on the stock exchange. But in the short-term time window, there can definitely be violent ups and downs. Anyone who bought the DAX at the end of 2021 and sold it again a year later had to cope with a loss in value of 12.3 percent.

On the other hand, investors who have invested in the DAX for 15 years or longer did not make a loss in any of the umpteen possible variants. With an investment period of 20 years, the average return was 8.6 per year. In the worst case, investors were left with a return of 3.3 percent, in the best case they could look forward to an increase of 15.2 percent on the money invested – mind you, per year.

35 years of the DAX – that could also be food for thought for one or the other (young) person who wants to make provision for old age.