Dividend Stocks: Passive Income for Beginners

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I still remember exactly the day I received my first dividend payout. CHF 87 from Nestlé landed in my account without my having to actively work for it. In that moment I understood why so many people talk about passive income from stocks. Today, five years later, I receive an average of CHF 620 a month in dividends, and that amount keeps growing. How you can build solid passive income with Swiss dividend stocks as a beginner, I'll show you in this article.

The biggest mistake I made at first: I picked stocks purely by the highest dividend yield. That led me to invest in companies that had to cut their payouts shortly afterward. Today I know that a sustainable dividend strategy takes beginners much further than simply chasing high yields. According to a 2023 analysis by Credit Suisse, Swiss stocks with continuous dividend payments achieved an average annual return of 8.7 percent over a 20-year period, while companies without dividends only reached 4.2 percent.

What dividend stocks are and how they work in practice

Dividend stocks are shares in companies that regularly pay out part of their profits to shareholders. In Switzerland, these payouts typically happen once a year, mostly in spring after the general meeting. For example, if you own 100 shares of Swisscom and the company pays a dividend of CHF 22 per share, you receive CHF 2,200 transferred to your brokerage account.

The dividend yield is calculated as the dividend divided by the current share price. With a price of CHF 500 and a dividend of CHF 22, that gives a yield of 4.4 percent. This figure alone, however, says little about the quality of the stock. More decisive is the dividend history: how consistently does the company pay out? Do the payouts rise over the years? And how high is the payout ratio relative to profit?

Swiss dividend stocks are considered particularly reliable internationally. Companies like Roche, Novartis or Zurich Insurance have paid their dividends continuously for decades and in many cases even increased them. This consistency makes them attractive for anyone pursuing passive income from stocks as a long-term strategy.

Which Swiss stocks pay reliable dividends

In my own dividend strategy for beginners in Switzerland, I rely on a mix of different industries. In pharma, I hold Roche and Novartis, both of which have paid dividends without interruption for over 30 years. In 2023, Roche paid a dividend of CHF 9.35 per participation certificate (Genussschein) at a price of around CHF 260, which corresponds to a yield of about 3.6 percent. Novartis, with CHF 3.30 at a price of CHF 85, came in at around 3.9 percent.

In the financial sector, Swiss Re and Zurich Insurance offer attractive payouts. In 2023, Zurich Insurance paid a dividend of CHF 25 at a price of about CHF 480, which equals 5.2 percent. With insurers, profits do fluctuate more than with pharma companies, but over longer periods they show a stable dividend policy.

Nestlé, as a consumer goods giant, is a classic for dividend collectors. With CHF 2.85 at a price of CHF 100, the yield is currently 2.85 percent. That seems low, but Nestlé has raised or at least held its dividend steady every year since 1959. This reliability makes the stock valuable despite the lower yield.

Swisscom, as a quasi-monopolist in the Swiss telecom market, offers a yield of 4.4 percent with a CHF 22 dividend at a price of around CHF 500. The company benefits from stable cash flows and can afford high payouts. However, growth potential is limited, which is why the focus is clearly on the dividend.

A detailed overview of different investment options helps you view dividend stocks in the context of your overall investment strategy.

How much capital you need for noticeable passive income

I hear this question constantly when I talk about Swiss dividend stocks with friends. The honest answer: it depends on what you mean by noticeable. Five years ago I started with CHF 15,000, which I spread across five different dividend stocks. With an average dividend yield of 3.5 percent, that produced about CHF 525 in payouts in the first year.

To generate CHF 500 a month in passive income, that is CHF 6,000 a year, you need capital of CHF 150,000 at an average dividend yield of 4 percent. That sounds like a lot, but remember: you don't have to invest that sum right away. I build my dividend portfolio continuously by investing CHF 800 a month and fully reinvesting the dividends I receive.

According to a 2023 UBS study, Swiss investors who consistently invest CHF 500 a month in a diversified dividend ETF reach assets of about CHF 155,000 after 15 years at an average return of 7 percent. The resulting annual dividends of around CHF 6,200 then already cover part of living costs.

The compounding effect is your best friend when building passive income through dividends. If you don't spend the dividends you receive but immediately reinvest them in new shares, your wealth building accelerates exponentially. In my case, the initial CHF 15,000 has grown to CHF 92,000 through continuous purchases and reinvestment.

Strategy for beginners: diversification and patience

My most important lesson from five years of dividend investing: never put everything on one card. I spread my capital across at least ten different companies from different industries and countries. My portfolio consists of about 60 percent Swiss dividend stocks, 30 percent European stocks like Siemens or Unilever and 10 percent US dividend aristocrats like Johnson & Johnson.

A concrete entry plan for beginners could look like this:

• Months 1-3: build a base position in three defensive Swiss stocks like Nestlé, Roche and Swisscom with CHF 1,000 to 1,500 each
• Months 4-6: add two financial stocks like Zurich Insurance and Swiss Re with CHF 1,000 each
• Months 7-9: diversify into European dividend payers like Siemens, BASF or Total Energies with CHF 800 to 1,000 each
• Months 10-12: top up existing positions and add a global dividend ETF with CHF 2,000

It's important that you don't try to find the perfect entry point. I invest by the cost-averaging principle: every month CHF 800 flows into my account, regardless of whether markets are currently rising or falling. Over longer periods the fluctuations even out, and you pay a fair average price.

The withholding tax (Verrechnungssteuer) in Switzerland is 35 percent on dividends, but you can reclaim it in full through your tax return. For foreign stocks, a withholding tax is additionally deducted in the company's home country, which can sometimes be reduced or reclaimed through double taxation treaties. You should take these tax aspects into account in your planning.

You'll find a structured approach to your whole investment strategy in my article on a well-thought-out investment plan, which also includes dividend stocks.

Avoiding typical mistakes in a dividend strategy

My biggest mistake in the first two years: I bought a stock with an 8 percent dividend yield without checking the business figures. The company cut the payout by 40 percent the very next year, the price collapsed, and I was left with a loss of CHF 1,200. Today, before every purchase I look at three key metrics: the payout ratio should be below 70 percent of profit, the company should have a dividend history of at least ten years, and the business model must be understandable and stable.

Another classic beginner mistake is focusing on high yields without regard for currency risk. When I bought British stocks in 2020, I was happy about a 6 percent dividend. What I didn't consider: over the following two years the pound sterling lost about 8 percent in value against the franc. My nice dividend was more than eaten up by the currency loss. Today I invest primarily in francs or euros to minimize currency risk.

Many beginners sell their dividend stocks too early when the price falls in the short term. During the COVID crisis in March 2020, I held my Swiss Re position even though the price plunged 35 percent within four weeks. The dividend was cut, but not scrapped. Today the stock stands well higher again, and the dividend is CHF 6.50. Had I sold, I would have missed that rebound.

According to a 2024 analysis by Vontobel, private investors lose an average of 3.2 percentage points of return per year through emotional selling during market crises compared with investors who hold their positions long term. Patience literally pays off with dividend stocks.

Using reinvestment and compounding

The difference between those who build considerable passive income with dividends and those who only achieve moderate success often lies in consistent reinvestment. I let all dividends I receive flow automatically back into the same or similar stocks through a savings plan. In the first two years that brought me only an additional CHF 120 a year, but after five years it's already over CHF 480, generated by reinvested dividends alone.

A calculation example illustrates the power of compounding: you invest CHF 50,000 once in dividend stocks with an average yield of 4 percent. Without reinvestment you receive CHF 2,000 a year in dividends, and after 20 years you've received CHF 40,000 in total. With reinvestment and an annual price increase of 3 percent, your portfolio grows to about CHF 148,000, which then generates annual dividends of around CHF 5,920.

For this I use a low-cost brokerage account at Swissquote, which lets me set up dividend reinvestment plans. With every payout, new shares are bought automatically without my having to intervene manually. That saves time and eliminates emotional decisions. Other Swiss brokers like Cornèrtrader or Interactive Brokers offer similar features.

In addition to individual stocks, you can also think about investing in ETFs that specialize in dividend stocks and offer broad diversification at low cost.

Tax aspects and optimization

The 35 percent withholding tax on Swiss dividends seems daunting at first. Of CHF 1,000 in dividends, only CHF 650 land in your account. But if you're subject to tax in Switzerland and declare your securities in the securities schedule of your tax return, you get the full withholding tax back. I fill out my tax return in March each time and receive the refund in my account by August at the latest.

With foreign dividend stocks, a withholding tax is deducted in the home country. For US stocks it's 15 percent if the W-8BEN form is filed correctly, for German stocks 26.375 percent. Through double taxation treaties you can reclaim the overpaid tax. That sounds complicated, but most Swiss brokers offer support in filing these forms.

An important point: in Switzerland, dividends are taxed as income, not as capital gains. That means they're subject to your personal income tax rate. At an average tax rate of 25 percent in Zürich, you pay about CHF 2,500 in taxes on CHF 10,000 in dividends. By comparison, capital gains for private investors in Switzerland are generally tax-free, as long as you're not classified as a professional securities trader.

This tax treatment makes it sensible to use dividend stocks specifically for passive income, while using high-growth stocks with no or low dividends for long-term wealth building. My portfolio is therefore deliberately split into a dividend part and a growth part.

Frequently asked questions about dividend stocks in Switzerland

How do dividend stocks work for beginners in practice?

You buy shares in a company and, as a part-owner, receive a share of the profit paid out as a dividend. In Switzerland, the payout usually happens once a year after the general meeting, directly into your brokerage account. If you buy 50 Nestlé shares at CHF 100 each, you invest CHF 5,000 and, with a dividend of CHF 2.85 per share, receive CHF 142.50 a year. You can either use this as income or reinvest it in new shares to take advantage of compounding.

Which Swiss stocks pay the best dividends for beginners?

For beginners, defensive stocks with a long dividend history like Nestlé, Roche, Novartis, Swisscom and Zurich Insurance are suitable. These companies have paid dividends reliably for decades and offer yields between 2.8 and 5.2 percent. More important than the absolute level of the yield is the consistency of the payouts and the company's financial stability. A mix of different industries reduces your risk and ensures regular payouts spread over the year.

How much capital do I need for dividend stocks as passive income?

For CHF 500 a month in passive income, you need about CHF 150,000 of invested capital at an average dividend yield of 4 percent. You can, however, start with smaller amounts and build your portfolio continuously. With monthly deposits of CHF 500 and reinvestment of all dividends, you reach this sum after about 15 years at a total return of 7 percent. The key lies in consistency and an early start, not in large initial investments.

What taxes apply to dividends in Switzerland?

Swiss companies deduct 35 percent withholding tax, which you can fully reclaim through your tax return. In addition, you pay tax on dividends as income at your personal rate. With foreign stocks, a withholding tax from the respective country is added, which can sometimes be reduced through double taxation treaties. Capital gains, on the other hand, are generally tax-free for private investors in Switzerland, which makes dividend stocks attractive mainly for current income.

Should I reinvest dividends or have them paid out?

In the build-up phase, I recommend reinvesting all dividends consistently. The compounding effect is thereby massively strengthened: CHF 50,000 becomes about CHF 109,600 after 20 years with a 4 percent dividend and reinvestment, and only CHF 90,000 without reinvestment. Only once you've built a large enough portfolio to cover your living costs does it make sense to use the dividends as true passive income. Most investors reach that phase after 15 to 25 years of continuous investing.

My conclusion after five years of dividend investing

Building passive income through Swiss dividend stocks is not a quick path to wealth, but a reliable one. My current monthly dividend income of CHF 620 has developed over five years, and it keeps growing every month. The key lies in the combination of continuous deposits, consistent reinvestment and a patient holding period.

Start with a manageable amount that you can afford to invest without getting into financial trouble. Build a diversified portfolio of at least eight to ten different dividend stocks, spread across different industries and countries. Use the withholding tax refund consistently and reinvest all dividends in the build-up phase.

The current stock market situation in 2024 offers quite attractive entry opportunities. Many Swiss dividend stocks are trading at moderate valuation levels after the SNB's rate hikes, while their business models remain intact. Anyone who starts today can generate noticeable passive income in ten to fifteen years that makes a real difference in everyday life.

Start your first investment today. Open a brokerage account, pick two or three solid Swiss dividend stocks and begin with an amount that's comfortable for you. The first dividend payment will motivate you to stick with it and keep building your portfolio.