Satrix managers will be listing a new and exciting exchange-traded fund (EFT) at the end of the month.
The Satrix Divi will track the FTSE/JSE Dividend Plus Index, comprising the 30 highest dividend-paying companies on the JSE (based on the McGregor BFA Survey), which is a consensus of one-year dividend forecasts made by stockmarket analysts.
Until now, all index-tracking funds have tracked companies based on their size rather than on performance.
Yet, historically, companies with high dividend yields have outperformed the market over the longer term and dividend yields are often used as a valuation technique by fund managers.
Simply put, if a company is paying out a relatively high dividend yield, then it must have strong cash flows.
A dividend yield is also a function of earnings and therefore companies with high dividend yields tend to be on lower price-to-earnings ratios, which make them relatively cheaper.
Sunel Veldtman, director at Barnard Jacobs Mellet Private Client Services, says the Satrix Divi is an excellent product for smaller investors who would not qualify for an actively managed share portfolio.
“We have been managing high dividend yield portfolios for the past seven years and have found that at difficult times, the high dividend share portfolios outperform as the yield acts as a cushion.”
This is good news for those investors who would like to take a more defensive stance in light of increased market volatility.
Veldtman says tracking the largest shares on the JSE can result in investors being exposed to overvalued companies. “You just need to look at the index in 2000, when many IT stocks were in the top 40. Tracking dividend yield gives you more reasonable valuations.”
Veldtman says the one drawback is that, as Satrix Divi is weighted according to dividend yield, those sectors that have the highest dividend yields — such as financials — can become overweight in the portfolio.
Compared with the top 40, where three shares make up the bulk of the weighting in the index, the current maximum weighting of a share is 7% and the minimum 3%, which removes the big cap bias experienced in a top-40 tracker, says Satrix manager Mike Brown.
Although Satrix Divi offers capital investors a valuable approach to passive investing, it also provides a tax-efficient income stream for investors who want to draw an income that is paid out four times a year.
Before the Satrix listing on August 30, investors can buy shares through the initial public offering (IPO) with no brokerage costs and a minimum investment of R1 000.
Based on the current value of the FTSE/JSE Dividend Plus Index, the new Satrix Divi share will trade at about R1,40 a share. Once listed, Satrix Divi can either be bought through a broker or the Satrix investment plan, which provides for monthly debit orders.
Brown says the investment plan, which carries a 1% annual fee, is the cheaper option for an investor with less than R300 000.
But for larger investments it might cost less to invest through a stockbroker.