There’s power in dividends. Need proof? The recession-based decision (in early 2008) of two of South Africa’s most consistent dividend payers, Old Mutual and Anglo American, to “pass” their annual dividends sent shockwaves through the investing community.
Fortunately, corporate earnings have improved with the subsequent economic recovery and these JSE heavyweights are again sharing part of their loot with shareholders.
“The fact is, if you monitor what is driving the market, dividend growth is a strong factor,” says Helena Conradie, head of sim.smartcore, the division within Sanlam Investment Management (Sim) that manages the largest equity portfolio of exchange traded funds (ETFs) in the country.
Sim is the underlying fund manager of South Africa’s third-largest ETF provider, Satrix. Conradie says, despite the decline in dividends — with dividends on the JSE All Share Index nearly halving from their peaks last year — investors should keep them top of mind because of their significant contribution to long-term total equity market returns.
Traditionally a private investor looking to benefit from dividends would select a few Top 40 shares with exceptional dividend histories. Today they might select something like Kumba Iron Ore (with a forecast dividend yield of 7.93%) and PPC (6.98%). But they might be disappointed.
What happens if either of these companies misses a dividend payment? The private investor in this two-stock portfolio would watch half the expected yield go up in smoke. Investing for one’s own account is a bit like being an active manager without the investment team and research capability to back you up.
Each decision to buy or sell a share will dramatically impact on your total return over time. Fortunately, there’s a safer way to include consistent dividend returns in your long-term portfolio.
The solution lies in the exciting world of exchange traded funds (ETFs). This useful passive investment tool resulted from continued efforts to maximise investor returns with minimum risk.
An ETF is a security that tracks an index, a commodity or a basket of assets, but trades like an ordinary share listed on the stock exchange. And it comes at a fraction of the cost of similar investments.
One of the most popular ETFs in the United States tracks the Standard & Poor’s 500 index. An investor who wants to “lock in” the performance of all 500 companies in the index does so by buying the “Spider” — a play on the products investment code — SPDR.
As at August 31 assets under management (AUM) in the global ETF universe topped $1.064-billion. Internationally, investors can choose from 2 308 ETF products offered by 129 providers on 43 exchanges. The South African market is tiny by comparison, with approximately R27.3-billion AUM as at August 31.
Local investors can select from 25 ETF funds offered by six providers. For those on a dividend hunt the ETF of choice is the Satrix Dividend Plus. This fund falls into a category known as “fundamental” indices, which is a group of indices that is gaining traction with investors because, instead of being market-cap weighted, they are based on actual underlying company fundaments.
The Satrix Divi (as it’s also known) invests in companies in the FTSE/JSE Dividend Plus index, which tracks the 30 companies in the Top 40 and mid-cap indices that are predicted to pay the best normal dividends in the coming year. The biggest single holding in the fund is Kumba Iron Ore, which makes up 6% of the total fund.
Other top dividend payers include Metropolitan, Liberty Holdings, African Bank and PPC. In keeping with the shape of the economic recovery the bulk of its holdings are in the industrial (accounting for around 71.5% of the portfolio) and financial sectors.
Conradie believes the Dividend Plus fund is a good way for an investor to diversify, especially if chosen alongside a Top 40 fund, such as the Satrix 40. Dividend-focused investing paid off for investors during the financial crisis. In the 12-month period to June 30 the Dividend Plus fund returned in excess of 30%, with 25% a year over 24 months.
The JSE Top 40 delivered an acceptable 20% in the latest year, but a dismal 7.5% annual decline over two years. Conradie says choosing stocks that offer value forms a key part of sim.smartcore’s stock-picking model, especially in volatile markets. It’s a strategy that rewards value investors too — those who pay special attention to dividend histories when picking stocks.
“The advantage of choosing dividend products such as the Satrix Dividend Plus fund is they’re actually simplified value funds in which investors don’t pay as much as they would for an active value manager.” South Africa is still behind the international curve when it comes to passive investment.
According to Strategic Insight, global investors dumped actively managed investment products over the first half of 2010. They “sold” $283.3-billion worth of mutual funds (unit trusts) versus $71.3-billion net purchases of ETFs. Kari van Rensburg, director of Deutsche Securities, believes financial advisers have a huge role to play in bringing private investors into the ETF fold.
“Occasionally, advisers themselves miss an opportunity; for example, the international trend to passive investment,” she says.
Vladimir Nedeljkovic, head of ETFs and index products at Absa Capital says both retail and institutional investors need to accept that it’s really difficult to outperform passive investments on a sustainable basis. “For the majority of private investors passive is the way to go.”