Dividend-paying stocks are companies that generate passive income in the form of interest, which is why investors like to buy such securities. However, many people forget that dividend yield alone does not tell you anything about a company, you need to check several indicators of the company. There are many other metrics related to dividend payments, which I will discuss now. I will also give specific, practical examples that I have encountered in the past 6 years, and which I could not have learned based on just reading theoretical books, I have marked these with a 📌 in the text.
If you stumbled upon this article while searching for specific dividend-paying stocks, then:
- You can find ideas in our dividend-paying stock filter: Dividend Screener
- Also read our company-specific stock analyses to see if you can find what you're looking for: iO Charts stock analyses
🤑The meaning of dividends
A dividend is the amount of money that a corporation pays to its shareholders, typically, but not exclusively, out of the profits it generates. An important element of paying dividends is that this obligation can only be fulfilled with “cash”, meaning that dividends cannot be generated using accounting methods. I can also put it this way: if companies pay out a portion of their profits in the form of dividends, you benefit from the company’s successes.
Many investors look at the amount of dividends paid by dividend-paying stocks. The amount of dividends is a measure expressed in a currency, such as USD, and is independent of other values. The dividend yield is a percentage value that is affected by the movement of the stock price. The amount is usually displayed in two ways on data search sites:
- How much does a company pay over the course of a year?
- the way the company pays it, which is usually quarterly in the US, but can be paid monthly. However, some European companies pay dividends semi-annually or annually, a good example of the former is the English company Games Workshop (Games Workshop analysis).
The dividend payout ratio can be deceptive, here's an example. If you search for Realty Income REIT stock on our site (O), you can see that the annual dividend rate is 3.22 USD/share in July 2025. However, below that is the payment schedule, which is monthly. That is, you will receive this amount in 1/12ths. Realty Income is more of an exception, the typical thing is that there are quarterly payments among American companies. However, in many places, annual payments are more common.
📌In practice: Some brokers also charge a fee for dividend payments. This is bad because there is typically a minimum amount that they charge, so if you are credited with your dividends monthly, you can expect to pay a much higher fee than if it is quarterly or semi-annually. Always check with your broker for these types of charges. Brokers are required to disclose this on a monthly basis, but it is usually available online immediately when a charge or credit is made to your account.
💸How are dividends paid on dividend-paying stocks?
Fortunately, you, the owner, don't have to do anything with the dividends if you own the stock. The dividends, minus the dividend tax, are automatically credited to your brokerage accounts. Usually, the issuing state already withholds some amount, but the amount depends primarily on:
- ✨What is the tax on dividends in a given state? For example, in the USA it is 15%, in England it is 0%, but in France it is already 28%
- ✨Does the country where you are a tax resident have a double taxation agreement? For example, before 2024, Hungary had such an agreement with the USA, at which time a 15% withholding tax was deducted on the US side, but this was abolished from 2024, so the deduction rate increased to 30%.
- ✨Where are you tax residents? You may spend part of the year in Spain, but let's say you are a Norwegian tax resident, in which case the Norwegian rules apply.
☝🏻It is important to note that the above only applies to withholding tax, and that other items may still be imposed on dividend income in the country where your income of this type is credited.
🇭🇺Hungarian aspects of dividend-paying stocks🇭🇺
💰Other terms related to dividend-paying stocks
The following are the concepts directly related to dividend-paying stocks:
- ✨dividend yield (dividend yield per year): the dividend rate expressed as a percentage, e.g. 4.14%
- ✨Dividend per share (dividend rate, expressed per share, per year): the total dividends paid must be divided by the number of shares, which will be a value expressed in a currency, e.g. 2.82 USD
- ✨Dividend growth rate, DGR (the rate of dividend increase per year): usually given in several forms. Last year, 3/5/10 year average, from these you can deduce the trend.
- ✨ex-dividend date: the date of the coupon cut, in the past a coupon was actually physically cut, now it is handled electronically, but the term has remained. By buying the stock on the day before, you will still receive the next dividend, which is also called an ex-dividend trading day.
- ✨Statement date (dividend declaration date): when the general meeting decides on the dividend payment and its amount. After that, the promised dividend will definitely be paid.
- ✨payment date (dividend payment date): the day on which the dividend is credited to the accounts
- ✨Dividend history (dividend past): describes past dividend payments, when they occurred, and to what extent
- ✨Years of growth (how long has the company been increasing its dividend): you typically see a number for such indicators, e.g. Realty Income has been increasing its dividend for 28 years
- ✨Current yield distribution (dividend rate distribution): shows the percentage of time the dividend yield was higher than the current dividend
📈Valuation of dividend-paying stocks
Two thoughts on the above. The current yield distribution is also used as a valuation indicator (SimplySafeDividends), simply because they assume that if a stock is undervalued, it will provide a higher dividend yield on capital. This will be discussed in the following chapters. This valuation indicator is based on the Dividend Yield Theory (Dividend Yield Theory), which dates back to the 1960s and is associated with the Investment Quality Trends, or IQ Trends for short. It appears in several works, one of which is Geraldine Weiss's book, Geraldine Weiss: Dividends Don't Lie.
My other comment is related to TTM and Forward indicators. TTM is an indicator calculated from the values of the last 12 months, e.g. you can see this in connection with earnings per share. Dividends, on the other hand, are typically forward-looking, so they are of the forward type, since after their announcement you can already expect that they will be paid, and you will also know the amount. For this reason, there may be differences between data sources showing the past and future dividend yields of dividend-paying stocks. It is also important to know that this data always refers to common shares. I explained what stocks there are in a previous article (Step-by-step process for buying shares (2025)).
📌In practice: I have seen companies in trouble cut dividends or simply suspend dividend payments several times. Here are a few examples from recent years: Burberry (BRBY), VF Corporate (VFC). This usually results in extreme price movements, because everyone who previously held the stock because of the dividend sells it, including large funds. If I trust the company, I prefer to buy at this time, because this means a depressed valuation, and although I do not receive a dividend at the time of purchase, when things get back to normal, such companies tend to restore their previous level in the long term. Since the dividend rate also depends on the valuation, I usually get not only the price gain, but also a higher dividend yield in the end.
📊Dividend calculation, interpretation, pitfalls
The percentage value of the dividend yield of dividend-paying stocks is calculated by dividing the dividend value by the current price. So, if the price is 100 USD and the dividend rate is 5 USD, it will be 5%. It is easy to guess from this that if the price changes, the percentage value will also change. That is why we also show the maximum, average and minimum dividend yields for the given period, as well as the differences from these. Let's draw the relatively simple conclusions together:
- ✨If the stock price falls, the dividend yield will increase in relation to the capital, if it rises, it will decrease.
- ✨Averaging, when you take a position in multiple steps during a falling stock price, increases the dividend yield on capital.
This is both a good and a bad situation. If you have a growth stock portfolio with few dividend-paying stocks, a price drop can be a particularly scary phenomenon. On the other hand, for someone who invests in dividend stocks, it is more of an opportunity, as the return on the new capital will increase. However, this can lead to situations like the falling knife problem. This means that a falling price of a company in trouble can at first glance seem like an attractive opportunity. A very good example of this is AIG (AIG), which has not recovered since the 2007 crash. I also included the S&P500 chart, to put it mildly, it was not profitable to hold this stock in the long term. You can see on the side that its maximum price was 1737 USD, and it is currently around 85 USD.
🔪📉What is a falling knife?
A falling knife is a company that is facing some serious financial problem, but the price reacts to this situation faster than the fundamental indicators. Let's assume for the sake of an example that our imaginary company is in trouble for some reason, for example, during a recession, fewer of its products are being purchased and this will cause a loss of income in the future. The market knows this fact, so the price starts to fall and falls from 100 USD to 50 USD, with a dividend payment of 5 USD. At this time, the previous 5% dividend yield will creep up to 10%! This is much better than 5%, then you should buy the stock. However, it is not certain that there will be enough money to pay the dividend, which will only be revealed in the next quarterly report, so the company announces a 60% dividend cut, cutting the dividend to 4%. In other words, instead of the original 5%, the owners will only receive 4%, not to mention the loss in share price.
This is one of the reasons why you need to know the other underlying data of dividend-paying stocks, as dividends have to be sustainable, the company must generate profit, and have a high free cash ratio to be able to pay them out.
📌In practice: In fact, a company does not have to make a profit to pay dividends, but can, for example, finance it with debt. An extreme example of this is Exxon Mobile (XOM), where the dividend payment obligation overrode the logical decision based on real economic indicators that the dividend should have been cut or suspended. The company survived the turbulent period, and even came out of it well in the end, and was finally able to reduce its debt.
➗Dividend-paying stocks and the P/E ratio
Does the P/E ratio matter for dividend-paying stocks? It's an interesting question, I see it referenced regularly, as it's the most well-known valuation ratio for stocks. Unfortunately, it can be very misleading. The P/E ratio is a combination of the share price and EPS, or earnings per share. As I have already shown, as the price falls, the dividend yield will increase, since it is nothing more than a percentage indicator, actually a division, nothing more.
What's the problem with this? Primarily, it creates the impression that the company is paying more dividends, even though the dividend amount remains constant. However, it is true that a falling share price will provide a higher percentage return on capital. The question is, what is causing the share price to fall? Because there could easily be some serious problem lurking in the background, which I illustrated with the example above. You always have to analyze the other indicators as well, this cannot be said enough.
💡If you want to delve deeper into the details of fundamental analysis, it is essential to understand what is included in each line of the balance sheet and income statement, which I have already written an article about: Balance Sheet and Income Statement for Stock Analysis (2025)
🔍Look beyond the P/E ratio and dividend yield
The previous paragraphs have already shown that it is worth looking into how dividend-paying stocks pay their dividends. It is not unimportant whether they pay from generated profits, from loans, how much debt they have, what their payout ratio is, and so on. In other words, you also need to be aware of the “health” of a company in order to be able to judge whether the dividend rate is sustainable.
Always examine all important corporate metrics for dividend-paying stocks, because dividend yield alone is not meaningful:
- ✨Payout rate: The “basic” payout ratio compares the company’s net profit to the amount of dividends paid, as you can read in the Investopedia article on this topic (What is the Payout Ratio?). The problem with this is that accounting includes all sorts of other things in the concept of “net income”, such as depreciation and amortization, which, however, do not appear as physical money.
- ✨Free cash flow payout rate: There is a video on FCF on Investopedia (Free cash flow), but in short, the point is: it is defined as the after-tax cash flow from which the company pays its creditors, reduces its debt, invests, pays dividends, and so on. In other words, it is a tangible indicator, not a figure that is twisted around by accounting, but money that can be paid out. This is important because its ratio better reflects the level of real dividend payments.
Debt indicators
- ✨Debt: It is important to know how much debt a company has. If the debt is high, the company has to pay a lot of interest to its creditors, which means two things: it is not certain that it will be able to maintain its dividend in the long term, and it is unlikely that it will implement a large or any dividend increase at all. However, the amount of debt in itself does not say anything, since the interest rate and the company's cash generation ability are not irrelevant. The net debt/EBITDA ratio is often used to show this relationship, which shows how many years of pre-tax profit the company could use to pay off its debt (where net debt = debt minus cash).
- ✨Earnings before tax, or EBITDA: Finance people love buzzwords and acronyms. EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and is used to create many metrics, as I wrote about in the debt section.
- ✨Interest coverage: It shows how well the company's cash-generating capacity covers the interest on its debt. If this ratio is low – higher is better – it could put pressure on dividend payments and lead to a possible dividend cut.
🏆Are these the best dividend-paying stocks?
To make the above more understandable, I have included some companies and a visual image of how to interpret the company's indicators. The example companies are T.Rowe Price (TROW), Texas Instruments (TXN), Bristol-Myers Squibb (BMY), AT&T (T) and Exxon Mobil (XOM).
The following lines contain significant simplifications. The point here is only to understand the example, fundamental analysis of a company is much more complicated than that, but the less data helps to follow the train of thought more easily even for those who are not familiar with company indicators.
📝Example 1: T. Rowe Price (TROW)
T. Rowe Price is a prime example of a dividend-paying stock. It pays an annual dividend of $5.08 per share, which is equivalent to a dividend yield of 5.35%, as of July 2025. It has virtually no debt, so you can forget about this indicator right away. It has a brutal cash generation capacity, it increases its dividend nicely, the 3-year average is 11.75%, and all its indicators seem impeccable. So should you rush to buy it now? First, it is worth looking at the valuation, which can also be determined from the dividend rate. The stock has paid an average of 3.74% in dividends over the past five years, and the current 5.35% is much higher, meaning the company is undervalued based on this indicator.
📌In practice: We have prepared a detailed stock analysis of TROW: T.Rowe Price Group Inc. Stock Analysis (NYSE: TROW)It's worth reading because it clearly shows that dividend payments are not everything. They haven't been able to attract more money into their funds for 10 years, the share price is falling, so there are plenty of risks here too.
📝Example 2: Texas Instruments (TXN)
It pays an annual dividend of $5.44 per share, or a 2.73% dividend. It has minimal debt, but its cash generation capacity is so strong that it could easily pay it off with just 1 year of profits. This company is also a brutal cash generation machine, increasing its dividend even faster than T.Rowe Price, whose 3-year average is 13.8%. All of its indicators seem impeccable. So should you rush to buy it now? Let's also look at the valuation here, what the five-year dividend average shows: 2.77%. This is roughly the same as the current dividend percentage value, so the company is trading at roughly the same valuation as before.
📝Example 3: Bristol-Myers Squibb (BMY)
It pays an annual dividend of $2.48 per share, which is a 5.06% dividend yield. It has a lot of debt, which is the result of previous acquisitions, such as Cellgene. This has boosted the company's revenue and cash generation, while its share price has been flat or falling for about 5 years, the market has priced in what happened. What is BMY likely not going to do? Raise its dividend a lot, buy back its own shares, and instead reduce its debt, which is not going very well, as you can see in the picture below.
Assuming that the debt reduction is successful, you could have a real money printing machine in a few years. Until then, you'll have to wait patiently and hope that nothing major changes in the company's life, or believe in advance that the company will actually be able to do this.
I would like to mention that the increase in revenue shown in the picture above looks very good, but you always have to look at how this was achieved. In this case, among other things, it is the increase in debt, but you could also mention share dilution, when the company covers the necessary costs with a share issue, the decrease in cash, which is often called an all-cash deal, when the company purchases entirely for cash, or the sale of components, etc.
📌In practice: I wrote the above in the original 2021 article, I just corrected the data in 2025. The company's debt is about the same as in the early 2020s, but their income has actually increased, as has the dividend rate. Unfortunately, the share price fell more than that, the market did not reward what they did. This was actually dead capital, over the past 5 years.
📝Example 4: AT&T (T)
AT&T is a master of poorly executed acquisitions, just think of the DirecTV acquisition (DirecTV is only worth $16B), which cost the company $67 billion. Unlike BMY, its future value creation ability is not really visible, and the company has since sold this unit. In addition, in the first half of 2021, it had to spend significant amounts, $27 billion, to purchase 5G frequency band licenses, and these two items resulted in a debt of nearly $180 billion. Let's take a look at how the company stands in July 2025:
It pays an annual dividend of $1.11 per share, which is a 3.98% dividend yield. The problem is that in February 2022, it announced a 47% dividend cut, cutting the dividend to $1.11, which it has not raised since. The company has a net debt/EBITDA of 8 – the number of years it would take to pay off its debt – which is an incredibly high debt. In terms of numbers, this translates to $138 billion! USD, while their annual revenue is $123 billion.
The joke is that AT&T (T) used to have a great dividend history, right up until the 2022 cut, but part of the 36-year dividend increase was made up of 1 cent per year. (That's how seriously American companies take this metric, which shows how many years they've been consistently increasing their dividend.)
📌In practice: AT&T previously paid a dividend of over 9% because its share price was crushed, which can be quite attractive, especially since the average yield of the S&P500 is around 10% over a 120-year period. When it paid a dividend of around 7%, I tried to use the stock as a bond substitute because I trusted its strong dividend history. In one year, I managed to generate a -15% loss in price in addition to the dividend, and I was lucky enough to sell the paper before the cut. Lesson learned: never do this, always prioritize quality, it is better to avoid companies with too much debt. This also shows that dividend payments alone mean nothing.
📝Example 5: Exxon Mobile (XOM)
Exxon Mobile, and the entire energy sector, is a separate category within dividend-paying stocks. I have written about the sector in detail twice:
The company's willingness to pay dividends is incredibly strong, this philosophy is encoded in its genes. This expectation is so strong on the part of the owners that the company is even willing to take out loans, fire its employees, reduce the development budget, etc., to satisfy such demands. However, this has caused its indicators to fall into the horror category in 2020-2021, although there were times when it meant an extremely high dividend of 11%.
The company had a very big problem during COVID, since no one traveled anywhere, most of the vehicles were parked, and oil was not consumed, so Exxon Mobile (XOM) was unable to generate a profit. Its cash payout ratio was 406.15% in 2020, so it paid out four times its free cash. Its net income this year was -22 billion USD. Now, of course, we know that Exxon Mobile and all the other similar companies, such as Chevron, Occidental Petroleum, etc., survived the crisis without a hitch, which also shows that there are situations when a company with a ruined share price and bad metrics can come out well.
📌In practice: In 2020, I bought a lot of oil stocks when I saw that the price of oil turned negative. This meant that refiners were paying to have their crude oil taken away from them. How credible was it that in the future cars, planes and ships would no longer be on the road and that there would be no plastic production, bitumen and fertilizer? Not at all, during this period it was possible to triple these names in a year (yes, that's a +200% return), plus collect the dividend. Of course, when their price corrected, I immediately sold all the companies, but this also shows that there are situations when you can buy a dividend-paying company, with a significantly depressed valuation, and collect both the price gain and the dividend.
🇭🇺Where are the Hungarian dividend-paying stocks on the list?🇭🇺
📊Where did I get the data from?
Not all screener sites display dividend data. Dividend.com used to be very useful, but they successfully destroyed it with a redesign last year, and a lot of the data is no longer available or you have to pay for it. That's how I started using it. iOChartsbecause I think it's one of, if not the, best sites for tracking dividend metrics. I've created a list that I used to write this article, so you can check the data too:
- iO Charts: since you've already found this and are using the services, I won't go into detail. It's a free-to-use site that displays graphs and figures, and provides dividend-related data for companies.
- Stock analysis: I have already written in another article, its biggest advantage is that financial data of companies going back 15 years is available without registration. It also contains information about minimum dividends.
- Simplysafedividends: paid site, not very cheap, but has great metrics and descriptions. They overreact a bit when it comes to predicting dividend security, but other than that, their services are easy to use.
- finviz: its filter interface is quite good, but it returns little data related to dividends, but you can also check the payout rate from here.
- Yahoo Finance: has a free price chart and can compare the price movements of tickers on the chart. It also shows dividend payments and stock splits under the historical data tab.
🔀Dividend-paying stock splits, treasury stock buybacks
Many people are unaware of how stock splits and share buybacks affect dividends and stock prices. A stock split is just a technical operation, it doesn't really do anything other than rearrange the numbers. I'll give you an example to illustrate what this means, but if you're interested in the topic, read this Motley Fool article: How do stock splits affect dividends.
The Model Company has 1000 shares, which are listed at $1000, and its market capitalization is $1 million. It pays a dividend of $50 per share, which is a 5% dividend yield, and the annual dividend costs $50. The company generates $100 in cash per year, so its FCF payout ratio is 50%. You own 10 shares, so you receive a dividend of $500 per year. If the company splits its shares 2:1, it will pay $25 per 50 shares, which is still $500, and you will still receive a dividend of $20, but for 2000 shares. The price will be halved, but since there are twice as many shares, the market capitalization will not change, so it will be $500*1=$XNUMX million.
➗What is the point of a stock split then?
It's just that it will be cheaper to buy 1 share, so more small investors can be involved in buying shares. The opposite is also true, e.g. Berkshire Hathaway's A share will trade at a price of 727000 USD in July 2025 (BRK-A), meaning only those with large capital can buy it. The other one, on the other hand, only has shares of 493 USD (BRK-B), which can be accessed with a much smaller amount of money.
In the case of share buybacks, things are completely different. If the stock is undervalued, it is in the company's interest to buy it back. The stock of the Model Company falls to $500, at which point its dividend yield is 10%. However, the company has excess cash, say $100000, which it uses to buy back shares. If it had bought back its shares at $1000, this would mean 100 shares, but at $500, this would be enough for 200. This reduces the number of shares from 1000 to 800, and the monetary value of the dividend paid from $50000 to $40000. This also improves the payout ratio, from 50% to 40%. The difference is $10000, which the company keeps. This means that the company continues to pay $5 per share for the remaining shares, so the other owners do NOT get an increase in their dividend per share, but the company spends less. Yet, indirectly, the company has more money left over, which increases the chances of:
- implement a larger dividend increase in the future
- buy back more shares
- make a value-creating investment
- reduce debt (if any)
Increasing dividends and buying back shares typically results in price increases in the long term, which increases investors' returns.
📤Specialties of dividend payments
Although in many languages the word dividend is used to refer to the amount paid out of a company's profits, there are other terms in English. MLP companies are a special form of partnership, and in their case, for example, dividends are called “distributions”. If you come across something like this, suspect that there is some kind of tax advantage here. Normally, dividends from companies registered in the US market are taxed at 15%, while MLP payments are taxed at 21%, but this also means that the tax is passed on to the shareholders, who in this case are called “limited partners”.
It is important to note that this is only true if the country where you are a tax resident has a double taxation agreement. A counterexample is that Hungary, for example, does not have such an agreement with the USA, so you will have to count on a 15% withholding tax instead of 30%. The lesson: everyone should check these rules for their own living situation to avoid any surprises.
source: Enrisk Consulting
MLP companies generally offer higher dividend yields, but this comes after deducting the extra tax passed through. Consider this if you are considering investing in such a company. There are quite a few such companies in the energy sector, for example (EPD), (MMP) and similar ones, which offer high dividend yields, but the tax burden is also higher, meaning you have to adjust the net after-tax dividend yield accordingly.
It is also worth mentioning for the sake of completeness that the interest paid on bonds is called a "coupon", which is not a dividend because it is based on credit, not corporate profits.
✅Advantages and disadvantages of dividend-paying stocks❌
Finally, I would like to say a few words about the general advantages and disadvantages of investing in dividend-paying stocks, compared to traditional investments that appeal to price gains, although there are always special cases that differ from this.
✅Advantages of dividend-paying stocks
- ✅Passive income: In an average market, with average valuation, you can achieve a dividend yield of around 2-10% per year. You don't have to do anything for it, the amounts are automatically credited to your account. If you forget about your investments, they will still produce, meaning you don't have to actively participate in management.
- ✅Calculate: Unlike stock price changes, dividend rates are declared in advance, so you can know exactly when and how much companies will pay.
- ✅Dividends do not have to be invested where they come from: As Warren Buffett said, there is no rule that says you have to put money back where it came from. That is, if you want to invest your dividend income in another stock, you can do so, but you can also spend this amount, of course, only after taxes.
- ✅Psychological support: It's easier to hold a falling or sideways stock, as the amount of the dividend is independent of the share price and you can receive it even if there is a huge panic in the market.
- ✅No fund management costs: If you hand-pick stocks or hold non-dividend ETFs, there are no additional costs, just a one-time broker commission when you buy the stock. However, some brokers tend to charge a fee for crediting dividends, which is a ridiculous rip-off. Be aware of this.
- ✅You don't have to sell the stock to realize the profit: Unlike capital gains, you don't have to sell the stock to realize the dividend. It is automatically paid and credited to your brokerage account.
❌Disadvantages of dividend-paying stocks
- ❌Mature company problem: Most dividend-paying companies are no longer in their growth phase. These are names with significant market capitalizations that are expected to grow only slightly. Of course, there are companies that pay barely noticeable dividends but can show significant growth in return, such as Apple (AAPL) or Microsoft (MSFT). Dividends are often a byproduct of generating an awful lot of cash, see Google for example.
- ❌Dividends are not required to be paid: The current company management decides whether the company will pay dividends or not, and whether to maintain, increase, or decrease the dividend rate.
- ❌Value creation problem: Paying dividends is not the optimal use of money. This raises the question of whether paying dividends is a kind of compulsion on the part of the company or not.
- ❌Additional tax burden: In the vast majority of cases, states impose a special tax on dividends, and in some cases the rate is downright painful.
- ❌False indicator: The size of the dividend or the rate of increase says nothing about the quality of the company, yet many people choose a company because it pays a high dividend.
- ❌Relatively large capital requirement and portfolio size: As an investor, it takes a lot of capital to create a diversified portfolio that generates significant passive income. Here's an example: with a 5% dividend yield and a portfolio of 100 USD, you will receive 5000 USD in dividends annually. This is not too much, even a serious government bond can do it.
📌In practice: I never really wanted to invest in dividend stocks because they pay dividends. Simply because of the dividend tax, you can't reinvest the money as if the company wasn't paying it out, but was reinvesting it within its own operations. Quality companies can achieve an internal rate of return of 20-30%, meaning they double their spendable cash in 3-5 years, which is a much more efficient way to grow than paying dividends, which you still have to pay taxes on. And a properly efficient internal rate of return should be tracked by the price in the long run.
Since capital gains are taxed more favorably in the vast majority of cases, there is not really a compelling argument in favor of dividend-paying stocks. In practice, this means that if a large part or all of the return on a stock comes from dividends, then I will not buy it. But, if a company pays dividends as a by-product of its activities, that is of course not an exclusionary reason, good examples of which are Apple, Microsoft or Google. In my experience, dividend payments are not nearly as certain, even in the case of American companies, as most people think, they simply cut them in the event of a crisis, when dividends would otherwise help investors hold on to the given paper.
Summary of dividend-paying stocks
The size of dividends and dividend yields alone say little about the quality of dividend-paying stocks. You should always check other indicators as well, as you need to know the coverage ratio, the payout ratio, the company's cash-generating ability, and much more. Don't make the mistake of choosing the company that offers the highest yield, but look at other underlying metrics as well. Some companies offer higher dividend yields because they are taxed differently, so always seek advice from tax experts.
Frequently Asked Questions (FAQ)
Do you hold the shares in a TBSZ account?
Yes. As a Hungarian citizen, the tax advantage over a traditional cash-based account is so great that it is worth opening a new TBSZ account every year, and then the withdrawal of money is also solved (but if you do not want to withdraw anything from it, you can extend these).
Is there a savings account similar to TBSZ in other countries?
There is no account with such good conditions as the Hungarian TBSZ. It is also worth mentioning the English ISA account, which is an abbreviation for Individual Savings Account, and its essence is that:
Annual deposit limit: GBP 20000 (for all ISA types combined)
Tax exemption:
- There is no personal income tax on interest.
- No tax on dividends
- No capital gains tax on exchange gains
The annual limit cannot be carried over to the next year – “use it or lose it”, and can only be opened and managed by UK residents. However, it also provides full tax exemption on dividends. A total of four types of ISA accounts can be opened, but the amount of each cannot exceed the annual limit of GBP 20000. However, a new savings account can be opened each year, so if you count the 5+1 year term of the TBSZ, then this means 6×20000 GBP in savings.
What is the essence of the English EIS account?
The Enterprise Investment Scheme (EIS) is a tax incentive scheme in the UK that private investors can use when investing in startups or small growth businesses.
🧾 The essence of EIS in brief:
- up to 30% tax relief on the amount invested in the EIS, up to a maximum of GBP 1 million / year, or GBP 2 million if you invest in a knowledge-intensive company.
- Capital gains tax exemption: returns on EIS shares are tax-free if you hold them for at least 3 years
- Loss mitigation: if an investment incurs a loss, the tax base can be reduced.
- CGT deferral: capital gains tax payable on existing assets sold can be deferred if the amount is rolled back into EIS
What are the above used for? Primarily for startup investments and 30% of the invested amount is written off from taxes. I have written about startups in several articles: Startup investments
Taxation of investments in Germany
Although I am not a tax expert familiar with foreign markets, unfortunately investments are taxed quite badly in Germany. At the moment we do not know of any savings account specifically designed for savings purposes, similar to the Hungarian TBSZ or the English ISA.
However, there are forms with very low limits:
- Tax-free interest and dividend allowance (Freistellungsauftragt): EUR 1000/person/year, for married couples EUR 2000/person/year
- Retirement savings, with state support: EUR 175/person + child benefit, the amount paid is deductible from the tax base
Since Germans tax their exchange rate gains and dividends in the 26-28% range, Germany is not very generous with its tax residents in terms of savings.
What does ETÜ mean?
ETÜ stands for Individual Capital Income After Taxation, or also known as individual capital income transactions. This is the conceptual and procedural framework for the taxation of capital income (e.g. share sales, exchange rate gains) achieved by private individuals in Hungary.
In fact, ETÜ is used when a foreign service provider makes a profit from a transaction that the tax authority does not receive direct information about. For example, buying and selling shares, options, cryptocurrencies, foreign exchange profits, and so on, the profit generated from these must also be declared to NAV.
Taxation of ETÜ
Exchange rate or dividend gains earned under the ETÜ are taxed in the same way as the underlying forms. That is:
- in case of exchange rate gains: crypto, shares with 15% personal income tax (losses can be offset against profits if they occurred within the framework of a regulated capital market transaction, for example crypto is not one of these)
- dividend: according to the rules of the given country + 13% socho
Since TBSZ accounts must be reported to the Tax and Customs Administration, in principle the Tax and Customs Administration also receives information about them (the service provider reports your numbers).
How are Hungarian dividend-paying stocks taxed?
Essentially, Hungarian companies are taxed in the same way as foreign companies, with one exception: they do not have to pay 13% social security tax on dividends, meaning the burden is always 15% personal income tax.
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