Money&investing
stocks”, the FTSE/JSE dividend plus index acts as a local gauge. The index tracks the top 30 stocks according to their forecast one-year dividend yield and draws its constituents from among the JSE’s top 40 and mid-cap indices — in essence the top 100 listed companies in SA.
It’s a strategy that has, in the recent past, worked well.
For the five years to end-February, this index produced a total return (including dividend payouts) of 120%, compared with the top 40’s 86.1% and the all share index’s 76.1%, according to FTSE Russell.
On an annualised basis, the dividend index returned 17.1% over five years and 19.4% over three years — beating both the top 40 and all share indices. On a 12month basis, the dividend index returned 46.8% compared with the top 40’s 20.1% and the all share’s 20.5%. Not a shabby performance for the JSE’s dividend clique.
But it wasn’t all smooth sailing for dividend investors during the pandemic.
“Covid really threw a bag of snakes at dividend payers,” says Ray Shapiro, portfolio manager at Counterpoint Asset Management. It was a tough two years, during which consistent payers withheld dividends to shore up their balance sheets and navigate through the uncertainties of the pandemic. But, Shapiro says, “they’re going to make a comeback”.
Dividend stocks’ comeback was strong, as seen in the dividend index’s oneyear performance. But Shapiro has a word of caution about blindly following dividend indices.
“A strategy that is really perilous is chasing yield — [that is] chasing the highest dividendyielding stocks in the market,” he says. “It’s extremely risky. It tends to underperform over the long term.” In terms of the dividend index, Shapiro says that chasing a one-year forward yield “sends you into riskier situations”. That’s because the price of specific stocks may be valued lower due to money managers’ view that these stocks are riskier by nature.
Byrne is also cautious about taking only a company’s dividend yield as a measure for building a portfolio of highyielding stocks. “We try to select only those businesses that have strong balance sheets and can pay sustainable and growing dividends to shareholders through the peaks and troughs of the business cycle,” she says. “We look as far back as possible in the company’s history to ascertain its ability to generate a sustainable return on capital invested by the shareholders and the company’s liability to convert these returns into cash and ultimately into dividends paid back to shareholders.”
At the moment the dividend index’s top five stocks, with a combined weighting of 39.7%, include Royal Bafokeng Platinum, Impala Platinum, Northam Platinum, Exxaro and Anglo American — all (highly cyclical) resources stocks.
“If you look at consensus earnings forecasts by the sellside ... a lot of earnings are forecast to be negative because people believe that [many] commodity prices are at elevated levels,” Shapiro says.
Fortunately, there are nonresource stocks that have been consistent dividend payers over a long time, bar maybe during the pandemic. Even those that withheld payouts may now emerge as stronger dividend payers. Byrne says Covid “forced a lot of companies to cut wasteful expenditure, think twice about plans for large capital expenditure that may not produce good returns, and focus on paying down their debt to de-risk their balance sheets”. Byrne views Famous Brands as a potential up-and-coming dividend payer. “Famous Brands is an example of a company that had high debt as a result of the acquisition of Gourmet Burger Kitchen but during Covid was forced to make the tough decision of divesting from that business,” she says. “Its balance sheet is now clean, and the excellent cash flows from its core business are no longer being deployed to a loss-making entity, so can rather be used for dividends.” Shapiro says some traditional names among the dividend payers include
British American Tobacco — which has been a “reliable payer” over time though its share price has showed some volatility — the JSE, grocery retailers, Bidvest, Hudaco, Santam, and the banks.