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Why dividends are key

Apr 26 2019 08:00
Schalk Louw

We all have that one thing or event that can take us right back to some of the best times in our childhood. 

I have plenty, but one that will always stand out is playing board games with my family at the dinner table during holidays. 

Unlike most families, we didn’t play Monopoly or Trivial Pursuit that often, but rather a board game called Shares. 

Without going into too much detail about the game itself, I will always remember my father’s reaction when he received dividends, and it’s precisely for that reason why this memory will stay with me for life. 

The moment he received his dividends, he used to sing a made-up song to which the only lyrics were “Dividends... dividends...dividends are key!” 

When we look at some of the world’s most successful investors, Warren Buffett can definitely be described as someone who often thoroughly enjoys singing the same song as my father. 

He has mentioned on several occasions that he gives preference to companies that pay high dividends and manage to increase those dividend pay-outs on an ongoing basis.

The “dividend song” has become so successful over the years that it resulted in the establishment of its own indices, both locally and abroad. 

For those of you who have no idea what I am talking about, I will gladly explain. 

The FTSE/JSE Dividend Plus Index (Divi+) has been in existence for nearly 13 years and it consists of 30 shares chosen from both the FTSE/JSE Top40 and the FTSE/JSE Mid Cap Indices (i.e. the top 100 shares listed on the JSE). 

These shares are chosen for their ability to measure the returns of the larger dividend payers. 

On a more technical note, contrary to popular belief, these shares are not only chosen for their dividend pay-outs over the last 12 months (as often indicated in the media), but rather which 30 shares have the best 12-month expected dividend yield. 

I’m sure there are still a few readers who may have some questions, especially on the shares that currently find themselves in this index. 

Sector-based, the largest portion of these shares currently come from the resources sector (32%), with financial shares in second place (28%). The top ten shares in the Divi+ Index make up nearly half of the entire Index (46%). They are (according to size):

1. BHP
2. African Rainbow Minerals
3. Old Mutual
4. Kumba Iron Ore
5. Liberty
6. Vodacom
7. Exxaro
8. Absa
9. British American Tobacco
10. MTN

When we take a look at these shares’ returns over the past few years, it makes sense why so many investors who had exposure to the Divi+’s underlying shares, could sing along with my father. 

Many articles have referenced the (broader) local market’s initial (artificially) good performance – thanks to Naspers’s weight in the FTSE/JSE All Share Index – which has since stabilised somewhat. 

When you find out that Naspers does not form part of the Divi+ Index, you would probably think that the index must have had a tough time over the past few years, but quite the opposite is true. 

Dividends were key!

The FTSE/JSE Dividend Plus Index has outperformed the FTSE/JSE All Share Index (JSE) by nearly two percentage points over the last year (up to 8 April 2019) at 8.92% vs. 7.13% and by 0.65 percentage points per year over the past five years (7.59% vs. 6.94%).

FTSE/JSE Dividend Plus vs. FTSE/JSE All Share Index 5-year returns

Schalk Graph

Source: PSG Old Oak & Thomson Reuters

All that said, I definitely do not believe that the dividend song is the only song to sing. 

On the contrary, I strongly believe that there is a place for companies that reinvest capital as opposed to paying dividends. 

No different to Naspers, Warren Buffet’s very own company, Berkshire Hathaway, does not pay dividends either, opting to invest that capital instead. Does that make Berkshire Hathaway a bad company? 

Definitely not.  

The important part of my message is firstly to remember the strength of dividend yields as an investment tool and secondly (and more importantly), its historical success. 

investment  |  dividends  |  jse
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