t appears that investors spend more than 80% of their time worrying about something that contributes less than 20% to their long-term total returns…”
This recent quote from Grindrod Asset Management is a critical one if you’re just getting into the investment game.
One of the problems we f ind in the investment environment is that the world has become obsessed with short-term market movements and a culture of “bubblevision” investment commentary on various television channels.
While we tend to get caught up in the hype of the news cycle, the two graphs below tell a fascinating story. At the top you have a Standard Bank graph and Mr Price’s at the bottom. What novice investors will find fascinating about the Mr Price graph is the contribution of dividends over the long term. As the company started to generate more sustainable profits and there was capital appreciation, the dividends grew nicely. The compounded annual return for the last five years alone has been 28%, if you had bought and held on to the stock.
Now let’s take a look at Standard Bank. The graph shows you that the bank has delivered in excess of 20% per annum total return. But the majority of that return has been a combination of dividends (a function of inflation) and then the real return on the capital. While these terms may sound complicated to the novice investor, the point that Grindrod Asset Management is driving home is that by buying in for the long term and enjoying dividends (share of profits) from the company, you will outperform those who are actively trying to time market movements.
“Dividends not only dwarf inf lation, growth and changing valuation levels individually, but they also dwarf the combined importance of inf lation, growth, and changing valuation levels,” noted Robert Arnott in the Financial Analysts’ Journal.
While an investor may look at these graphs and comments and start scanning the Finweek dividends table for the best payers, remember this comment from Wilhelm Hertzog, who is a portfolio manager with asset management firm RE:CM: “Investing with the goal of generating the best total return over time, within the constraints of a given risk profile, is a far superior way of allocating one’s capital than to invest solely for income (or, for that matter, solely for capital growth). Determining what the best vehicle is for generating these risk-adjusted returns should be the primary consideration in any investor’s mind, not whether the returns are being earned in the form of income or capital growth.
For those who find the idea of trying to pick the next Mr Price or Standard Bank intimidating, one of the best starting points is to go to one of the big name asset managers like Allan Gray, Foord, Investec, Coronation and Old Mutual and start off with an entry-level dividend unit trust. Once you get your feet wet, the curiosity to learn more about investing and individual stocks will grow.