Knowing strategies reaps dividends

Marriott’s blue-chip approach tops tables for the past decade

● Marriott’s focus on quality shares with growing dividends has put its Dividend Growth Fund at the top of the local equity fund performance log again — this time over the 10-year period.

Its staid investment strategy of buying stable blue-chips that deliver reliable and growing dividends means it may not always be the fund that shoots the lights out.

However, its consistent solid returns bring it to the top of the South African domestic equity subcategory performance tables from time to time, especially during difficult periods for the equity market.

Over the 10 years to the end of December, the fund showed an average return of 13.28% a year, making it the second-best performer after boutique fund manager Walter Aylett’s Aylett Equity Prescient Fund, which returned an average 14.09% a year, according to Morningstar data.

Over the 15-year period to the end of December, another fund with a dividend focus, the Prudential Dividend Maximiser fund, is ranked sixth with an annual average return of 18.39% a year, while the Marriott Fund is 12th with an annual average return of 17.06%.

Dividends account for between 25% and 30% of your total return and can be a more reliable driver of equity returns than share price gains.

The number of funds and exchange traded funds with a dividend-focused strategy has broadened recently. There are now seven local unit trust funds, including four that launched in the past five years from Bridge, Prescient, Counterpoint and Citadel and three index-tracking funds.

However, one may soon disappear — the Old Mutual High Yield Opportunity Fund. Old Mutual is in the process of balloting unitholders in this fund for permission to merge it with the Old Mutual Managed Alpha Equity Fund, which focuses on capital growth rather than income.

The Old Mutual High Yield Opportunity fund returned, on average, 14.59% a year over 15 years and ranked in the last quarter on performance of 44 funds with 15-year track records.

Investors needing to draw an income should not ignore a dividend-focused strategy as it can provide a growing, reliable income stream from investments.

The index-tracking or smart beta funds with a dividend focus are competing on low management cost. In these funds, less of your dividend yield is lost to costs — typically around 0.3% instead of the between 1% and 2.5% that active funds charge.

The returns as well as the maximum drawdowns or investment losses and the income distributions that these funds produce suggest diverse approaches to selecting good dividend-paying shares.

Over five years, for example, returns vary from 11.75% a year from the Prudential Dividend Maximiser Fund down to 7.42% a year from the Citadel SA Dividend Equity H4 Fund.

Over three years, returns vary from a high 7.97% a year from the Satrix Divi Plus Index Fund down to 2.81% from the Old Mutual High Yield Opportunity Fund.

Income distributions — the dividends paid on a R100 000 investment — vary from R805 to R4 116 and drawdowns vary from -15% to about -40%.

Lourens Coetzee and Duggan Matthews, who manage the Marriott Dividend Growth Fund, say that while the fund seeks out shares with a high dividend yield (dividends relative to the share price), they prefer shares with reliable and growing dividends over those with the highest yield.

Dividend growth is the biggest driver of capital value over the long term, they say.

Focusing on a reliable stream of dividends has also paid off for the fund, giving it a low maximum drawdown or fall in investment value over the past 10 years.

Its drawdown is 18.61%, while many equity funds have drawdowns of more than 30% or 40% from the 2008 market crash.

Marriott’s investment strategy keeps it out of shares that depend on cycles that are impossible to predict, such as resources shares.

Among the index-tracking funds with a dividend focus, the Satrix Divi Plus ETF now has a 10-year track record with an average return of 11.67% a year, according to etfSA’s survey to the end of December.

The CoreShares Dividend Aristocrats ETF and Sygnia Dividend Index Fund (unit trust) have three-year track records.

Over this period, the Satrix fund has returned 7.79% a year, the CoreShares Dividend Aristocrats ETF 8.54% a year and the Sygnia Dividend Index Fund 7.79% a year.

Two of the index trackers, the Satrix Divi Plus and the Sygnia Dividend Index Fund, track the FTSE/JSE Dividend Plus Index. In this index, shares are selected on the basis of their expected dividend yield (dividends divided by the share price) over the 12 months ahead.

The CoreShares Dividend Aristrocrats, however, tracks the S&P Dow Jones Dividend Aristocrats Index, which seeks shares with consistency of dividends over a seven-year period and equally weights the chosen shares. This can lead to quite different returns and drawdowns from these two types of tracker funds over time.