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Dax course: What is behind the all-time high?

Anyone who invested in all shares in the leading German index Dax five years ago has only seen a meager 1.5 percent price increase per year since then – despite the most recent record value.

Can’t be? But. The new Dax record of up to 16,331.94 points can be deceptive. Because the usually reported Dax also includes the dividends. From a purely mathematical point of view, it is as if the dividend were immediately reinvested in the respective share. This method of calculation is known as the performance index. If you include the dividends, Dax investors with an investment period of five years already have an annual return of more than four percent. The new Dax record can only be achieved with dividends as a return driver.

Pimped performance

Some see a clever marketing trick behind it. A performance index looks much better than a pure price index that would be calculated without dividends. This is shown by comparing the Dax performance index with the Dax price index: the latter is still a good six percent below its all-time high, which it achieved around the turn of the year 2021/2022. But in Germany, the Dax course index receives little attention. When people talk about the Dax in this country, they mean the performance index.

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Internationally, performance indices are actually unusual. Whether the Dow Jones index or the S&P 500 in the USA or, for example, the Nikkei in Japan: most of the world-famous stock indices are price indices. So they only show the price development of the stocks listed in the index, and they simply hide their dividends. The world stock index MSCI World, which is popular among ETF investors, is calculated in both variants, as a price and as a performance index.

So is a performance index actually a scam? Not that one. After all, dividends are not a mirage. In fact, the money distributed ends up with the investors and they are free to reinvest it in the respective share immediately or to use it in some other way. However, if you only leave the dividend in a savings account with a meager interest rate, you will lag far behind the index development in the long term in terms of returns.

In any case, only a few investors can dispose of the entire gross dividend. In reality, at least 26.375 percent withholding tax and soli are deducted as soon as the savings allowance of 1000 euros per year in capital income is exceeded. Some indices try to show such tax deductions and are calculated in a “net variant”.

Who drives the Dax and who slows it down

When looking into their depots, investors who are closely oriented towards the Dax when buying shares should be disappointed for another reason. Because not all of the 40 Dax shares are close to their all-time high. The index record can thus be misleading. But hardly any investor weights the shares exactly as they are weighted in the index. If a share that is heavily weighted in the index rises particularly strongly, this drives the index, but not the portfolio with Dax shares to the same extent.

Only eight of the 40 Dax stocks are currently close to their respective all-time highs, according to data from the financial information service Bloomberg. Their prices are currently less than ten percent below their previous highs. There is indeed an index heavyweight: Siemens. The conglomerate is currently close to the previous record price and has a weight of around eight percent in the index, which is particularly important. The other stocks that are close to their previous highs are weighted somewhat less to significantly less heavily there: Porsche, Beiersdorf, Hannover Re, Rheinmetall, Airbus, Deutsche Boerse and Munich Re.

On average, the 40 Dax shares are even 38 percent below their previous record prices. Seven shares are listed 70 percent or more below their respective historical highs: These are Continental and Vonovia (70 percent deviation), Zalando (71), E.On (75) Deutsche Telekom (79) and – particularly punished – the shares of Deutsche Bank (89 percent below the high) and Commerzbank (96 percent).

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In the interplay of weighting and dividends, it is still enough for a new high in the Dax. This is also due to the particularly high dividend yield in the index. The average there is currently 3.4 percent, while international indices such as the Dow Jones (2.2 percent), MSCI World (2.2 percent), Nikkei (2.0 percent) and S&P 500 (1.7 percent) remain well below the dividend yield. Viewed in this way, the Dax price index makes the performance of German shares look too bad because it does not reward their above-average dividends.

Also read: How the Dax Dow Jones and Nasdaq performs

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