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A cool­ing mar­ket re­quires a new strat­egy

The JSE looks ex­pen­sive, there’s no doubt about it. It’s been trad­ing at or near record highs for the past few months — and the earn­ings aren’t nec­es­sar­ily there to back up the lofty lev­els. Cur­rent val­u­a­tions show the mar­ket trad­ing at around 19 times re­ported earn­ings, well above its his­tor­i­cal av­er­age. That may come down slightly at the end of the cur­rent re­port­ing sea­son, but not by much if cor­po­rate re­sults so far are any­thing to go by.

An­a­lysts ex­pect the mar­ket to move side­ways for now, but a cor­rec­tion could also be in the off­ing. Com­men­ta­tors sug­gest a pull­back of 10% or more. So, as the mar­ket cools off you’re un­likely to see much cap­i­tal growth on your in­vest­ment un­less you are a canny stock-picker.

While one school of thought is that tar­get­ing div­i­dends is best for those en­ter­ing re­tire­ment and re­quir­ing an in­come, an­other camp be­lieves tar­get­ing div­i­dends re­gard­less of age or in­vest­ment stage will add to your cap­i­tal growth in the long term, if those div­i­dends are rein­vested.

Do the sums: it can make a mas­sive dif­fer­ence. You can dou­ble your re­turns over a 40-year pe­riod just by rein­vest­ing a cou­ple of per­cent a year. The trou­ble is earn­ings — and div­i­dends — can be er­ratic, which is why some fund man­agers ap­ply fil­ters to en­sure a steady div­i­dend flow and no nasty sur­prises, like when An­glo Amer­i­can scrapped its 2008 fi­nal div­i­dend to con­serve cash as com­mod­ity prices fell sharply dur­ing the global fi­nan­cial cri­sis. Com­mod­ity prices are again un­der pres­sure, most no­tably oil and iron ore, and div­i­dends are threat­ened again. So Mar­riott As­set Man­age­ment won’t touch com­mod­ity com­pa­nies, de­spite the juicy pay­out ra­tio Kumba Iron Ore of­fers — one of the high­est on the JSE. Like Sa­sol, Kumba’s div­i­dend is un­likely to be as gen­er­ous as it was in the past, but it’s still likely to rank among the larger pay­ers of div­i­dends.

A quick glance at the JSE’s All Share shows the com­pa­nies that have been gen­er­ous in the re­cent past. Kumba and BHP Bil­li­ton rank up there, as do MTN and Vo­da­com, with yields north of 5% on an his­tor­i­cal ba­sis. Mar­riott likes health­care and some of the re­tail­ers, which have strong cash flow and tend to in­crease their prices in line with in­fla­tion or more. So per­haps in­clude the likes of Spar, which yields 2,8%, and Life Health­care, at 3,8%. The banks also pay de­cent div­i­dends, with yields of 3,5% to 5% for the big four. The life com­pa­nies are a good source too, with Lib­erty, San­lam and Old Mu­tual all on a div­i­dend yield of over 3%, while MMI is on 4,5%. How­ever, th­ese com­pa­nies are geared to the mar­ket, so any cor­rec­tion could af­fect fu­ture earn­ings.

For­get share buy-backs, par­tic­u­larly for the stocks that are look­ing ex­pen­sive. Though that’s an­other route for re­turn­ing cap­i­tal to share­hold­ers, they don’t make sense right now with earn­ings mul­ti­ples where they are. In fact, many man­agers would rather have the cash, which can be rein­vested in other po­ten­tial div­i­dend growth stocks.

The Mar­riott fund which tar­gets div­i­dend growth has done well, but so have some of the ex­change-traded funds that tar­get the big­gest pay­ers of div­i­dends — and in­clude stocks ac­cord­ing to their his­tory of div­i­dend pay­outs or ex­pected pay­ments. Tak­ing the pas­sive ap­proach that ETFs of­fer also cuts costs, which means even more com­pound growth for the long term.

You can dou­ble your re­turns over a 40-year pe­riod just by rein­vest­ing a cou­ple of per­cent a year

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