In­vest DIY:

More great div­i­dend pay­ers

Finweek English Edition - - CONTENTS - Ed­i­to­rial@fin­week.co.za *The writer owns shares in Metro­file.

in the last edi­tion, I wrote about div­i­dends as in­come and, even if you’re not in re­tire­ment, you can use that in­come to buy more shares. I touched on some stocks and what to look for and this week I want to look at the other great div­i­dend pay­ers: prop­erty and pref­er­ence shares.

Pref­er­ence shares are debt in­stru­ments is­sued by banks and other large JSE-listed com­pa­nies. They pay div­i­dends based on the cur­rent prime rate and you can get some great yields with the ex­change-traded fund (ETF) PREFTX, which cur­rently of­fers a yield of nearly 9% – many in­di­vid­ual pref­er­ence shares of­fer even higher yields. How­ever, there are three con­cerns. Firstly, you get no cap­i­tal growth; you might, but that is not the de­sign of these shares. So all you get is the same in­come go­ing for­ward, sub­ject to moves in the prime in­ter­est rate, and at some point in the fu­ture in­fla­tion would have eaten it all up.

The sec­ond is­sue is that link to prime; your up­side is capped be­cause, at the end of the day, how high can prime re­ally go? The prime rate is likely to move be­tween maybe 9% and 15%. Com­pare this with the yield of a com­pany that can, in the­ory, rise in­def­i­nitely as prof­its in­crease. So, when you own a com­pany, not only does your cap­i­tal grow, but your in­come grows as well.

The third is­sue is my con­cern around the down­grad­ing of our sovereign debt to junk sta­tus. If this hap­pens our banks will also get down­graded and, while there is no chance of a de­fault from our big banks, how will the mar­ket re­spond? I don’t know, but look­ing back at what hap­pened in 2008 dur­ing the dark days of the cri­sis, pref­er­ence shares were sold off ag­gres­sively.

Now sure, you’ll still get the in­come but your cap­i­tal is get­ting killed and will it re­cover? Post-2008 we’ve seen the re­cov­ery, but there’s an ex­tra is­sue lurk­ing. Due to the in­tro­duc­tion of the new Basel III rules, banks will be get­ting rid of their pref­er­ence shares (some have started, oth­ers will fol­low in time). If prices col­lapse, the banks may use this weak­ness to quickly buy back their pref­er­ence shares, lock­ing in that cap­i­tal col­lapse for in­vestors.

The other op­tion for in­come is prop­erty, and this is a great op­tion. Not only can you get some at­trac­tive yields, but you also get a solid un­pin of net as­set value (NAV) as prop­erty stocks hold phys­i­cal prop­er­ties as their as­sets.

The is­sue here is the premium paid for NAV, and that has been stretched in re­cent years by the share prices of listed prop­erty run­ning very hard. You also need to hunt for the high-qual­ity prop­erty stocks and they tend to have lower yields. A +10% yield on a prop­erty stock is overly high and car­ries risk. I would also have a close look at how much debt the prop­erty stock has; any­thing above 50% debt-to-NAV is a con­cern.

So what’s the an­swer when it comes to look­ing for in­come from in­vest­ments? For me it is about bul­let­proof (as bul­let­proof as pos­si­ble) stocks such as Vo­da­com and Metro­file*, com­bined with some great prop­erty stocks, or even a prop­erty ETF. The in­come starts small but grows steadily and af­ter a cou­ple of years makes for se­ri­ous reg­u­lar cash flow into my ac­count that I can in­vest wher­ever I feel is best.

The other op­tion for in­come is prop­erty, and this is a great op­tion. Not only can you get some at­trac­tive yields, but you also get a solid un­pin of net as­set value (NAV) as prop­erty stocks hold phys­i­cal prop­er­ties as their as­sets. A +10% yield on a prop­erty stock is overly high and car­ries risk. I would also have a close look at how much debt the prop­erty stock has; any­thing 50%above debt-to-NAV is a con­cern.

Where in­come from in­vest­ment is con­sid­ered, Vo­da­com is seen as a bul­let­proof stock.

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