/ 29 November 2010

What the Dividend has to offer

Dividends contribute to long-term total equity market returns, peaks and troughs notwithstanding.

Income in the form of dividends can be a very attractive option for investors, especially in the current investment environment where it’s likely that the dividend cycle has reached its trough and therefore dividend payouts should improve again.

A dividend is effectively a portion of a stock’s income which is paid to shareholders in a company or mutual fund. A dividend pays out realised capital gains and is most often quoted according to the currency amount each share receives or in terms of a percentage of the current market price, which is known as dividend yield.

According to Helena Conradie, head of sim.smartcore at Sanlam Investment Management which is the underlying fund manager for Satrix, many companies slashed their dividends when the financial crisis hit.

“Now, however, the likes of Anglo American, Old Mutual and other companies that were forced to shelve their dividends are starting to pay dividends again,” she says.

Conradie explains: “The fact is, if you monitor what is driving the market, dividend growth is a strong factor.” She says that despite the recent decline in dividends — with dividends on the JSE All Share Index nearly halving from their peaks last year — investors should always keep them top of mind because they have contributed significantly to long-term total equity market returns.

The FTSE/JSE Dividend Plus Index is constituted by the top 30 dividend-paying companies in the country. The Satrix Dividend Plus fund is a product that replicates this index by tracking these top 30 stocks, by one-year forecast dividend yields, expected to pay the best dividends.
This is similar to the way other Satrix products track the main FTSE/JSE indices.

If you’re looking for both capital growth (with a view to reinvesting dividends) and high dividend yield then the Divi may well appeal. It’s also good for compounded returns and can grow with inflation, which offers a powerful reinvestment incentive to investors.

The fund is based on actual underlying company fundamental financial metrics, rather than being market-cap weighted. This approach offers all the benefits of passive investing, such as lower fees than actively managed funds, but is structured in a more sophisticated way.

In the few years it’s been in existence, it’s performed well, with a dividend yield of 3,33% per security. It’s also worth noting that the fund has outperformed the All Share Index over a five-year period.

The Satrix Dividend Plus fund outperformed its closest rival, the Marriot Dividend Growth Unit Trust, by a whopping 8% total return a year, showing that passive funds such as the Satrix Divi Plus can outperform actively managed unit trusts.

Recent Asian statistics (to September 30 2010) show that the Satrix Divi is in fact the top performing equity unit trust over two and three years. It’s the second best performing unit trust (across all fund types) out of the 1 000 registered unit trusts over three years.

If you haven’t given much thought to the Divi thus far, now may be a good time to do so.

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