WHY DIV­I­DENDS HELP YOU TO IN­VEST BET­TER

Finweek English Edition - - FRONT PAGE - BY SCHALK LOUW Port­fo­lio man­ager at PSG Wealth

It takes a rel­a­tively small piece of dough to bake a fresh loaf of bread. For bet­ter re­sults, leave the dough in the oven un­til it is fully proved and baked. If you be­come im­pa­tient, as I of­ten do, and open the oven too soon, it will fall f lat and might end up smaller than the orig­i­nal piece of dough. The pa­tient baker takes the loaf out of the oven only af­ter it has been prop­erly baked.

One of our great­est fears is that we may not have made suf­fi­cient pro­vi­sion for our needs af­ter re­tire­ment. Much like bak­ing bread, your pro­tec­tion lies in proper plan­ning, the right “in­gre­di­ents” and pa­tience. Those who still have enough time and can af­ford a lit­tle more short­term volatil­ity may con­sider shares that ren­der high div­i­dends. BUILD FU­TURE IN­COME Let’s say you have a port­fo­lio of R2m from which you would need a monthly in­come of R6 300 (in to­day’s rand cur­rency terms) af­ter 10 years. By in­vest­ing in the stock mar­ket at the cur­rent av­er­age div­i­dend rate of 3.11%, you would earn around R5 200 per month. The ac­tual div­i­dend pay­ments on the lo­cal stock mar­ket in­creased by nearly 4% more than inf la­tion over the past 50 years. That means if you in­vest your R2m in the stock mar­ket and the div­i­dend pay­ments in­crease by 10% (ex­pected inf la­tion of 6%, plus 4%) per 60 000 50 000 40 000

30 000 see that the his­tor­i­cal div­i­dend rate paints a some­what dif­fer­ent pic­ture. For the longer term in­vestors seek­ing fu­ture in­come for their in­vest­ments, the cur­rent “ex­pen­sive” on a PE ba­sis mar­ket shouldn’t cause the least bit of dis­cour­age­ment.

DIV­I­DEND PAY­MENTS OVER THE PAST 50 YEARS SHOWED MUCH

THAN THE SHARE PRICES THEM­SELVES

YOUR OWN AN­NUAL “IN­CREASE” In­vestors can buy di­rectly into shares that have good div­i­dend po­ten­tial. Based on Bloomberg con­sen­sus, I have iden­ti­fied five shares that should en­joy good growth over the next few years, both in price and div­i­dend yield: Bil­li­ton, FirstRand, Im­pe­rial, MTN and Sa­sol.

These shares cur­rently stand at an av­er­age his­tor­i­cal div­i­dend yield of 5.3%, very favourable not just when com­pared to other shares, but also the money mar­ket. Had you in­vested your R2m in equal parts in these five shares 10 years ago, your in­come would have been R47 800 in the first year. It would have grown to R383 100 at the end of the 10-year pe­riod (i.e. by 23.4% per an­num). Of course, we can­not ig­nore that this in­cluded the mar­ket cor­rec­tion of 2008, where in­vestors sim­ply had to shut their eyes and “leave the bread in the oven”.

If you want to ex­pe­ri­ence the joy of freshly baked bread, leave the dough in the oven for the right pe­riod of time. It will prove it­self.

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