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15 Jun 2018

Don’t discount the dividend

Not much is said about dividends in the modern business world, where share prices go from zero to 100 in less than a second. Instead, it’s all about capital growth or the re-rating of a share’s price as the accountants hope that the next growth market or life-changing app will sustain 20 percent earnings growth into perpetuity. Share prices sky rocket and trade at premium valuations because of these elevated expectations for future, uncertain earnings growth.

Despite numerous studies highlighting that dividends and growth in dividends translate into an excess of 90 percent of a share’s total return over time, we tend to spend 90 percent of our time talking about capital return and not much else.

Bennie van Wyk, Portfolio Manager at Sasfin Wealth asks, why then are dividends still so important?

Firstly, investments that never yield cash are extremely risky. What is the difference between an ounce of gold or a piece of art or a share in a company that does not pay a dividend? The value depends on what someone else would be willing to pay, and without an underlying cash earnings stream, it is difficult to determine that value.

It has been shown that growing dividends are a reasonable predictor of future returns. Numerous studies refute the statement that low payout ratios lead to superior growth. In fact, many global leading companies have maintained high payout ratios while still growing earnings at a healthy rate. Locally, for example, Standard Bank has been averaging a 50 percent payout ratio while still growing its dividends by 17 percent per annum.

Dividends offer a margin of safety. High dividend-yielding shares tend to be more defensive in nature, outperforming others during times of crises.

A margin of safety and subsequent lower capital volatility ensures that the positive effect of compounding works in your favour.  For example, a consistent 10 percent per annum for three years delivers a 33.1 percent compound return, while 20 percent, then -10 percent, and then 20 percent again compounds to 29.6 percent.

It is important to invest in a combination of productive assets that deliver a consistently growing earnings or dividend stream. Ideally, this takes the form of a multi-asset class portfolio invested in high dividend yielding equities, listed property, preference shares, fixed income securities and offshore investments.

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