THE FOR­GOT­TEN DAR­LING

Financial Mail - Investors Monthly - - Contents -

Not much is said about div­i­dends in modern days how­ever, es­pe­cially in a world where share prices go from 0 to 100 in less than a se­cond. It’s all about cap­i­tal growth or the rerat­ing of a share’s price as the ac­coun­tants ex­pect the next growth mar­ket or life-chang­ing ser­vice or app to sus­tain 20% earn­ings growth into per­pe­tu­ity. Share prices sky rocket and trade at pre­mium val­u­a­tions be­cause of these el­e­vated ex­pec­ta­tions for fu­ture (un­cer­tain) earn­ings growth. De­spite nu­mer­ous re­search stud­ies high­light­ing the fact that div­i­dends and growth in div­i­dends ex­plain in ex­cess of 90% of a share’s to­tal re­turn over time, we tend to spend 90% of our time talk­ing about cap­i­tal re­turn and not much else. So why are div­i­dends so im­por­tant?

1. In­vest­ments that never yield cash are ex­tremely risky. What is the dif­fer­ence be­tween an ounce of gold or a piece of art or a share in a com­pany that does not pay a div­i­dend? The value de­pends on what some­one else would be will­ing to pay and how do you de­ter­mine that value if not rel­a­tive to an un­der­ly­ing cash earn­ings stream?

2. It has been shown that grow­ing div­i­dends are a rea­son­able pre­dic­tor of fu­ture re­turns. Nu­mer­ous stud­ies re­fute the state­ment that low payout ra­tios lead to su­pe­rior growth. In fact, many global lead­ing com­pa­nies have main­tained high payout ra­tios while still grow­ing earn­ings at a healthy rate. Lo­cally, for ex­am­ple, Stan­dard Bank has been av­er­ag­ing a 50% payout ra­tio while still grow­ing its div­i­dends by 17% per an­num.

3. Div­i­dends of­fer a mar­gin of safety. High div­i­dend yield­ing shares tend to be more de­fen­sive in na­ture and out­per­form dur­ing times of crises (the op­po­site is also true though)

4. Mar­gin of safety and sub­se­quent lower cap­i­tal volatil­ity en­sures the pos­i­tive ef­fect of com­pound­ing work­ing in your favour (a con­sis­tent 10% per an­num for 3 years de­liver a 33.1% com­pound re­turn while 20%, then -10% and 20% again com­pounds to 29.6% - re­mem­ber War­ren Buf­fet’s rule about not los­ing money?)

I be­lieve it is im­por­tant to in­vest in a com­bi­na­tion of pro­duc­tive as­sets that de­liver a con­sis­tently grow­ing earn­ings (div­i­dend) stream, ide­ally in the form of a multi-as­set class port­fo­lio in­vested in high div­i­dend yield­ing eq­ui­ties, listed prop­erty, pref­er­ence shares, fixed in­come se­cu­ri­ties and off­shore in­vest­ments.

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