Last Updated on April 26, 2022 by Rational thinking
Instead of buying an active mutual fund, you can choose to invest in an investment company. We have previously written several articles about these stocks and why they are a very good option for most investors. The main benefits are low management costs, diversification and active ownership. Additionally, most of them have an active and able majority owner.
We believe you can beat the averages by putting together a portfolio of these stocks. Thus, in some weeks we will add a portfolio of investment companies on our portfolio page.
Swedish investment companies pay dividends
Swedish investment companies pay dividends due to taxation. The dividends received by the investment company are taxable, but the tax rules state any dividends paid are deductible. Thus, taxation is mostly eliminated for the investment company. Shareholders in tax-deferred accounts can thus delay taxation further into the future, just like in any mutual fund. Taxation is in most countries a complicated matter and is best left to lawyers. However, for those who understand Swedish, you can have a look at this link from the Swedish IRS.
What is a dividend?
A dividend is not necessarily a cash transfer from the company to its shareholders. A dividend can for example come in the form of spin-offs. Additionally, buybacks function just like a dividend (but are more flexible). We have written many articles about dividends, please check out our landing page for dividend investing:
Investment companies and their dividends
Swedish investment companies mostly pay a regular dividend, but in addition, they can buy back shares or opt for shareholders to redeem some of their holdings.
We believe most readers understand the concept of a dividend: It’s simply a transfer of cash from the company to the shareholders.
Instead of a cash dividend, the company can buy back shares. This is a tax-free distribution and shareholders increase their ownership in the company. If the outstanding shares are for example reduced by three percent, then you as a shareholder increase your ownership by three percent. This means you grab a bigger pie of the future profits. This is, of course, a more flexible approach than being forced to receive a dividend: you can make your own dividend by for example selling shares equivalent to the increased ownership.
The last option is a little more complicated than a regular dividend but frequently used by many investment companies: to redeem shares. As with buybacks, this gives the shareholders options.
In a redemption procedure, the investment company offers to purchase a portion of the shares to its shareholders. The shareholders are entitled to redeem at a predetermined price. Instead of a cash dividend, the investment company pays a cash amount to the shareholders by purchasing their shares. Shareholders who chose not to participate in the redemption procedure can sell their redemption rights to increase their holding. This is of course an advantage for shareholders who would otherwise be forced to pay tax on a dividend before they reinvest (if they were in a taxable position).
Let’s continue by looking at each investment company’s dividend history. We start with Latour:
Latour’s dividend history:
Latour pays an annual dividend with a payment day in mid-May. As we can see from the graph below, they have reduced the dividend several times, even though the overall trend is increasing:
Öresund’s dividend history:
Öresund has in many years chosen to spin-off several of their holdings. This way they maintain their cash position, while the owners can choose themselves if they want to keep or sell their shares in the companies spun-off. Below is a summary of the payments, redemptions and spin-offs since 2007:
|2012||1 Fabege: 10|
|2013||1 Skistar: 10|
|2014||7.5||1 Bilia: 10|
|2018||5.5||1 MQ Holding: 10||1 Bilia: 10|
Industrivärden’s dividend history:
The overall trend is rising, even though the dividend is cut three times since the year 2000:
Investor AB’s dividend history:
Investor AB has cut the dividend twice since 1997:
Kinnevik’s dividend history:
Ratos’ dividend history:
Ratos has struggled to perform, and consequently, the dividend has suffered:
Svolder’s dividend history:
Svolder aims for a rising dividend, but the growth has been mediocre since the year 2000:
Lundbergföretagen’s dividend history:
In terms of avoiding a dividend cut, Lundbergföretagen has performed the best with only one cut:
Bure’s dividend history:
|2011||0||Bought back 4.7% of the shares|
|2015||1||1||Bought back 2.1 million shares|
Traction’s dividend history:
Traction has had a rather erratic journey over the last 20 years. However, the dividend is gradually rising:
Creades’ dividend history:
Creades was spun-off from Öresund AB in 2012 and thus has a short history. Initially, the main idea was to redeem shares as it’s a more flexible distribution than paying a dividend. However, in 2016 it was decided to start paying a regular dividend. The CEO letter to the shareholders in 2019 gives a detailed description of the process and why it was changed, a very interesting read. A cash dividend of 14 SEK was paid in 2017, 2018 and 2018.
If you are a dividend investor it makes sense to invest in investment companies. They are diversified and thus better prepared to withstand a recession. However, don’t let your dividend bias obscure your analysis. After all, it’s the business model and management’s execution that determine the future earnings. Thus, the dividend should never be the sole reason to invest in a stock, in our opinion.
Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinion – they are not suggestions to buy or sell any securities.