Nordic Dividend Policies
What are the main differences between Nordic dividend policies and the US?
The main differences are that Nordic firms mostly let the dividend go up or down in accordance with the annual earnings, and most dividend stocks pay the dividend annually, not quarterly. Sweden is the exception where many companies aim to pay a higher or at least equal dividend compared to the year before.
Less focus on the dividend:
Sweden is the only Nordic country that has a substantial following in regards to dividend investing. The reasons are most likely a much bigger investment community and additionally, Sweden has the biggest stock market both in terms of market cap and the number of listings. Historically Sweden has always been the kingpin in terms of stocks. Sweden is an industrial powerhouse with a wide range of different industries on Nasdaq Stockholm, while for example Norway is much more concentrated on fish farming and oil/gas.
Falling interest rates “force” investors to dividend stocks
Dividend investing has gained a lot more interest over the last years, just like it has in the US. We believe this is twofold:
Falling interest rates:
There aren’t many options left except accepting you need to take more risk to get “income”. Government bonds yield next to nothing, some even have negative rates (how absurd is that!), and investors have shifted from bonds to equities. This gained momentum after the GFC in 2008/09 all the while equity markets have witnessed a spectacular boom. We suspect many investors have not fully understood that equities are indeed a lot riskier than government bonds.
The FIRE movement:
FIRE is an abbreviation for financial independence, retire early. The internet is packed with fairy tales of people who have saved up enough capital within the 4% withdrawal guideline. This movement has hit the Nordics, and Twitter and social media are flush with savers. Perhaps not surprisingly, many are tempted to invest in dividend growth stocks to create a big nest egg and have “income” from dividends when they quit their 9-5 jobs.
Nordic dividend policy:
In a master dissertation by Tor Brunzell and Eva Liljeblom called Dividend policy in Nordic listed firms they concluded most Nordic listed firms have a specified dividend policy. The bigger the company is, the more likely they have a defined policy in place. There are three main considerations the board makes:
- Capital structure
- The outlook of future earnings
- The shareholder structure
Obviously, the capital structure is of importance. Nordic companies are in general conservative with debt and aim for a margin of safety. Thus, dividend growth is usually of lesser importance than serving the debt.
As a result of swings in earnings, many companies let the dividend go up and down in relation to the earnings. We would go as far say that only Sweden has a culture among listed firms in trying to keep the dividend equal or higher than the previous year. Denmark has a few of them, and Norway and Finland less.
Shareholder structure is an underrated aspect of investing. Family-controlled stocks have to our knowledge performed better than others, and we believe for good reasons: if the management and board members suffer from bad earnings just as much outside investors, alignment of interest is secured. It’s no coincidence that Warren Buffett spends a lot of time in writing the annual shareholder letter. He wants to educate the shareholders and turn them into long-term rational business owners.
Nordic companies with a concentrated shareholder structure tend to have a defined dividend policy, more so than others, according to the above study.
Most Nordic dividend-paying companies pay a yearly dividend, usually late in the first quarter or in the second quarter. Very few companies pay a quarterly dividend on their common stock. For example, Norway had only four stocks paying a quarterly dividend prior to Covid-19: TGS, Equinor, Mowi and Ocean Yield). Even Sweden, with a much longer history of stock market investing, has very few quarterly payers. Thus, if you invest in Nordic stocks, expect to receive the dividend in April or May.
Of course, if you’re a dividend investor you can reinvest faster the more dividend distributions there are. But we are of the opinion that an annual dividend policy makes for more flexible capital allocation policies. As we have written numerous times on this website, a dividend is not always a smart decision for the shareholder. So why restrict your options by forming a dividend policy of increasing the dividend annually?
Nordic dividend taxation (and withholding taxes):
As a general rule, all Nordic countries withhold 30% withholding taxes on dividend payments to foreign residents. By claiming relief from a tax treaty, you can reduce the rate to 15% in most instances. However, the paperwork can be burdensome, and sometimes it depends on your broker. As always, a good idea is to contact the broker before you invest.
To sum up:
We would say, as a rule of thumb, that the Nordic has less focus on the dividend than in the US (and the UK). The reasons are most likely cultural. Furthermore, most Nordic companies pay an annual dividend, not quarterly.