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The fund's dividend might be good, perhaps as much as 5%/year, but the capital risk is infinitely multiplied, as the weightings attached to each of the 30 shares included in the fund are estimated or calculated, or whatever, by people.
Satrix 40 is made up of the Top 40 shares and the participation of each in the product is determined by its market capitalisation. That's why Anglo American and BHP Billiton have by far the greatest weight. A purely mathematical calculation is made from time to time to determine the weighting of each of the 40 shares. Significant changes, such as which drop out and which new ones come in, occur at the bottom and don't have much effect on the overall composition or performance of Satrix 40.
Not so with the dividend fund. Weights are allocated to the 30 shares in the fund according to their current dividend yield and what share analysts forecast, as set out on I-Net Bridge. On that basis, the shares in the table have been chosen as the top five in Satrix Dividend Plus.
I only had to read that far before my hair stood on end and I got goosebumps on my arms. Not one of those five shares is suitable for widows and orphans. Nevertheless, Satrix Dividend Plus is presumably going to be marketed largely to older people, who rely heavily on income.
Just for a start, the share prices of JD Group, Northam Platinum and Impala fell sharply over the past two months, by an average of more than 20%. Those declines in part caused their historical dividend yields to increase so much that they earned heavy weightings in the dividend fund. The consensus view that those shares would declare good dividends in future was reached before the sub-prime crisis on the world's financial markets and it could easily - especially in the case of the platinum shares - become quite useless.
There's also still great uncertainty concerning JD Group. So far, it hasn't yet announced the results of its so-called internal investigation into excessively high interest rates charged. Early in November, JD will report on what's been achieved for the financial year to 31 August 2007. At the halfway mark, things didn't look at all well and profit growth had already levelled off to less than 10%.
Speculative investors are currently buying the share at R64. After all, that's 37% lower than its peak earlier in the year. There may perhaps be merit in that speculative buying, but there's no way the share can now be included in a dividend fund that's out to give the impression of security and a good income.
African Bank (Abil) hasn't disappointed over the past few years, but it can certainly not be classed as a top share. For the purposes of deposits, the bank is also not included in the top five and Abil usually finds that it has to pay up to as much as one percentage point more on the money and capital markets for the money it wants to attract than SA's big banks have to.
For a good dividend I prefer an investment in Coronation Asset Managers. Even the slightly lower dividend yield on the big banks, such as Standard and FirstRand, which are incidentally both currently growing by between 20% and 30%/year, are far more attractive.
Forget for the moment the good dividend yield that Satrix Dividend Plus could perhaps offer. The top five shares in Satrix 40 are: Anglo, BHP Billiton, SABMiller, Richemont and MTN. Now those are in a completely different class from the top five in the dividend fund. It's like comparing slaughter sheep with Fridays.
Years ago, young investment advisers (like yours truly) said that old people should sell their Rembrandt shares as their dividend yield was usually less than 2%, or about half of what could be earned on other, far less bright lights. That was a mistake.
The solution given by the old master - the late Harry Laurie, who also wrote a column on personal finance years ago in Finweek's predecessor Finansies & Tegniek - was very simple: buy the top share, Rembrandt, even though the current dividend was low. If the widows and orphans were really having cash flow problems, a few of the Rembrandt shares could be sold every year. The capital growth on the remaining ones would more than compensate for the few that had to be sold.
To my regret, I didn't follow Laurie's advice years ago. But it's not too late now to make a clear recommendation. Stick with Satrix 40, with its low dividend yield, and avoid the man-made Satrix Dividend Plus. That applies particularly to young investors now in the process of building up a portfolio.
* Vic de Klerk holds shares in Satrix 40, Coronation and Remgro.
