Dividends are set to become a more important component of the return on equities in 2010, as share prices struggle to deliver impressive growth, but it is important to examine the form of profit distribution to achieve tax efficiency, according to Bank Sarasin.

In its new research paper, The Importance of Dividend Yield, the Swiss private bank examines the best dividend options for institutional and private investors this year - a period in which it expects to see the Swiss Market Index gain just one per cent overall, closing 2010 at 6600 points.

Given that last year the index gained 19.2 per cent, this means any dividend payouts would represent a higher proportion of the overall return on investment this year. Meanwhile, as far as dividend payouts for 2009 are concerned, unlike last year, Sarasin expects the market consensus forecasts to be met in the majority of cases.

However, the fact that dividends attract income tax in Switzerland means that profit distribution needs to be examined carefully to ensure tax efficiency.

Options which should be considered are par value repayments – comparable in essence to a dividend payment but which in principle remain tax free for private individuals in Switzerland – share buybacks, and cash or title options (COTOs). Particularly, COTOs, when used in conjunction with par value reductions, offer attractive benefits, the bank said in a press statement. 

Furthermore, changes to Switzerland’s tax laws in 2011, when the Corporate Tax Reform II comes into force, mean that more companies will be able to make tax-free payments to investors, says Sarasin.

However, as important as dividend payments will be this year, when it comes to investing in equities, a focus on dividend yield alone will not pay off, said Patrick Hasenböhler of Sarasin Research.  

“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,” said Mr Hasenböhler.

In Switzerland, these are mainly financial and real estate companies; Sarasin recommends buying Zurich Financial Services, Swisscom, Credit Suisse, Valora and Nestlé.

For private investors, the bank suggests buying shares which pay profits in the form of a par value reduction, including Mobimo, Swiss Prime Site, and 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. The bank also recommends shares in E.On, Munic Re, GDF Suez, Total and Allianz.