Flavour of the month

Re­move your cash from un­der the mat­tress

Finweek English Edition - - MONEY CLINIC - LEANI WES­SELS leaniw@fin­media24.com

THE PROVER­BIAL MAT­TRESS is stuffed with cash. When money mar­ket funds are re­turn­ing less than the av­er­age sav­ings ac­count and ev­ery­body else is stuck wait­ing for Greece to flinch, no­body is rush­ing to place their hard-earned pen­nies in an in­vest­ment ve­hi­cle. Since 2009, more than a spec­tac­u­lar US$4 tril­lion has dis­ap­peared glob­ally into the black hole of zero-re­turn, cash-based funds. So how to beat the bank rate? Or at the very least in­fla­tion?

Cap­i­tal growth was ap­peal­ing back when ex­cite­ment reigned and cau­tion was for sissies. Now the flavour of the month is to be con­ser­va­tive, with a fixed in­come re­turn and a liq­uid mar­ket look­ing in­creas­ingly ap­peal­ing. En­ter prop­erty com­pa­nies. Case in point is the Pub­lic In­vest­ment Cor­po­ra­tion (PIC)’s mas­sive push to in­crease its ex­po­sure to South Africa’s prop­erty sec­tor. Gov­ern­ment’s pen­sion fund man­agers have grown their prop­erty port­fo­lio from around R3bn to more than R27bn over the past seven years. Pen­sion funds are largely be­hind the im­por­tance of in­come yields com­pared to good old cap­i­tal re­turns, as they’re tax ex­empt. Even though in­di­vid­u­als pay tax on prop­erty div­i­dends (called dis­tri­bu­tions) it’s still a vi­able con­sid­er­a­tion. Listed prop­erty com­pa­nies are de­liv­er­ing a dis­tri­bu­tion of around 8%.

“Prop­erty stocks are not risk-free. But peo­ple are com­par­ing the 3% to 4% they can get from a money mar­ket fund to the 8% to 9% re­turn from a prop­erty in­vest­ment,” says An­ton de Goede, of Corona­tion Fund Man­agers. De Goede says smooth en­try into the prop­erty sec­tor is via a prop­erty unit trust in listed prop­erty. “Through a unit trust you have ac­cess to a di­ver­si­fied port­fo­lio and the ex­pert knowl­edge of prop­erty an­a­lysts. An­other ben­e­fit is you can ini­ti­ate a debit or­der to put as lit­tle as R500/month into the unit trust,” he says. A stokvel into the listed prop­erty sec­tor is an­other op­tion.

A high div­i­dend yield port­fo­lio takes a lit­tle more love and care to cre­ate than just throw­ing some money at Growthpoint. How­ever, div­i­dends are tax free and likely to get big­ger over time. “Work with your bro­ker or use your on­line trad­ing fa­cil­ity to nar­row down the shares to in­vest in a port­fo­lio of around five shares,” says Si­mon Brown, of JustOneLap, an on­line ed­u­ca­tion por­tal for in­vestors and traders. “That will con­cen­trate risk to a large ex­tent but it also means a smaller cost of trans­ac­tion.”

Brown nar­rows down the shares on the JSE to those with a his­toric div­i­dend yield of more than 5%, have a mar­ket cap above R5bn and a con­sen­sus div­i­dend growth fore­cast of more than 20%. Though that leaves you with only a hand­ful of shares, com­bined they should of­fer a yield of around 6% and more than 12% in five years, he says. Brown says that’s for those look­ing for in­come: you’re not look­ing for the share price to move or for cap­i­tal growth.

Al­though prop­erty is the safe bet, your dis­tri­bu­tion growth will track in­fla­tion and rentals. That doesn’t make for shoot-the­lights-out re­turns. If your time hori­zon is longer, div­i­dends from a high yield port­fo­lio will be much higher. And they’re not tax­able.

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