Best asset class of 2008
Not too late to get aboard
THE PRICES of listed preference shares have increased by around 15% over the past six weeks. That dramatic improvement and the excellent cash dividend yield of between 12% and 14% that investors earn on prefs in any case make this the best asset class so far for 2008. It’s amazing to think that in the midst of an environment of huge resources shares and a First World financial sector, a modest product such as listed preference shares is the best place to park your money.
The dramatic increase in the prices of prefs was brought about by the change of perception regarding inflation prospects about two months ago. The negative mood then – when the inflation rate rose sharply to above 10% and producer prices were heading for a 20% increase for the year – has made way for renewed confidence that the inflation rate, and therefore also interest rates, could again fall.
The trigger was presumably the drop in the price of crude oil and the latest prospects that petrol and diesel retail prices would drop by as much as 100c/litre at the start of September.
For old investors who had to look on despondently over the past few years at the constant fall in the prices of preference shares, while every adviser who knows anything about the product tried to talk the prices up, the increase is excellent news. Their capital losses over the past three years have been nearly wiped out within six weeks.
For other investors, especially those dependent on an income, who haven’t yet bought preference shares it’s still not too late, says Sasfin’s Elan Levy. He’s also the compiler of the graph, showing clearly the increase in the prices of pref shares. He says it’s not too late to buy.
Levy’s price index starts in June 2006 on 100. A few weeks ago it fell to below 75. Now it’s recovered to 85. However, the correct or deemed value, as he calls it, is probably closer to 100, as it was in 2006.
The current dividend on A class shares, such as those of SA’s Big Four banks, is still above 11%, while investors slightly lower down in Sasfin and PSG can enjoy a 13,5% dividend yield. That’s equal to an interest income of around 20%/year for individuals with a marginal tax rate of 40%.
Choose your favourite from the table and don’t hesitate to buy.
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