There is one type of share that might have slipped under your radar and could be the reason why your portfolio is underperforming. This type of share provides more consistency in returns through an increased income yield, essentially improving the likelihood of a successful outcome and has proved especially resilient in difficult financial markets. We are, of course, talking about dividend-paying shares.
To address this investment gap in the market Sharenet has recently launched its Dividend PSP, a portfolio of high dividend-paying shares managed on your behalf by an experienced team of portfolio managers using our proprietary-developed Sharenet Analytics research model. The objective being to achieve high yields and steady capital growth while still keeping fees lower than comparable unit trusts or exchange traded funds (ETFs).
A company’s ability and willingness to pay dividends speaks volumes about its quality.
Those who invest in dividend shares favour them for the following reasons:
#1 You can’t fake dividends
A company must have cash flow to be able to distribute dividends to its shareholders. No amount of clever accounting can help a company pay an attractive dividend to its shareholders consistently each year if there is no money available. The average dividend yield for companies listed on the JSE’s All Share Index is 2.8%, so you would want to aim for a higher yield than that. This strategy would have avoided any investment in Steinhoff, which historically had a dividend yield nearer the 2.3% level.
#2 Dividend growth is more important than yield
Companies that can grow dividends year-on-year are often the best-managed companies. In fact, ‘dividend aristocrats’ is the term used to describe the exclusive club of companies that have increased their dividends each year for over 25 years. Research has proven that these companies outperform the broader market over the long term.
#3 They are a safer bet in bear markets
In a bear market most companies fall victim to the market sell-off, but some feel the pain a lot more than others. You will often hear about investors and fund managers fleeing to quality companies when the selling pressure gets too much. These quality companies are typically regular dividend payers and a safer bet during market corrections. Investors can also reinvest dividends received during these periods as share prices are under pressure, which will further enhance returns when the market eventually recovers.
#4 You continue to get paid
The South African equity market has seen prices trade mostly sideways over the last four years. Regular dividend paying stocks continue to distribute cash to shareholders, meaning you still receive the income while you wait for prices to increase.
Dividends have been one of the most effective and consistent sources of investment returns. This is evident in Table 1 below, which shows the percentage of the JSE All Share Index’s total return attributable to dividends over the last 20 years:
These figures illustrate why, when it comes to dividend-paying shares, you can expect a large portion of your total return to be in the form of dividends and why it is so important to pick the right shares.
Dividend Biased Share Selection versus General Index Biased Selection
Below is a comparison of a Dividend Biased Share Selection compared to a General Index Biased Selection for the last 10 years.
It is apparent that not only has the Dividend Biased Share Selection delivered greater returns over this period, it has also delivered them more consistently and with less volatility. The return per unit of risk (Sharpe ratio) has been signifcantly higher and its sensitivity to overall market movements, as meaured by Beta, has been lower than the market average over the period, confirming the strength of dividends during market downturns.
High dividend-paying shares should, without question, form part of your investment portfolio - and Sharenet’s Managed Dividend PSP is the perfect vehicle to help you make the most of this class of shares. There are of course other investing strategies available, depending on your risk appetite, such as diversifying your portfolio to include both dividend-paying shares and more risky options but this is a decision best discussed with your financial advisor.
To view all our trading packages and to find out how you can start taking advantage of Sharenet’s Managed Dividend PSP today simply visit www.sharenetsecurities.co.za
Let us guide you
The process of opening a new account, or transferring your existing account from your current broker, is quick and easy. There are zero costs involved and all admin, except the initial steps, will be done by the helpful Sharenet Support Team. Want more information? Click here and we’ll call you back or contact us on 021 700 4815.
Head of Trading and Portfolio Analyst
Tel: 021 700 4815
Stephan heads up Sharenet’s trading desk and is a full-time trader and portfolio analyst, also responsible for equity research across industries. Stephan developed his passion for the markets while working in the Stockbroking division of Standard Bank and is especially passionate about CFD trading. Stephan studied at the University of Stellenbosch and completed a BComm Honours (Business Management) with a focus in Portfolio Management and Bonds. He has also passed the JSE Equity Trader’s Exam, RE5 (Representative) and RE1 (Key individual) Exams as well as the Registered Persons Exams (RPEs) in order to give advice on equities.