Dividend investing is the right strategy for a low-return environment – asset manager
Dividend investing is a strategy that I think has a lot of value. Essentially, the idea is that you pick stocks which have a higher-than-average dividend yield (that is, price to dividend ratio). It's a quick-and-dirty form of value investing, in which you select stocks that pay out a lot in proportion to their price, plus it's a great way to ensure reasonably predictable stock earnings, since dividend payments tend to be consistent. As a bonus, dividend-yield portfolios have been shown to be less volatile than the market as a whole, since dividend-paying stocks tend to be bigger, well-established blue chip companies with stable earnings, and to deliver returns that are at least as good as the market as a whole (and often better).
All in all, this is a good strategy, especially as we enter a period of slower earnings growth and lower economic growth. Reliable dividends that you reinvest in the market are a good way to maintain returns in a low-return environment. – FD
GUGULETHU MFUPHI: According to Feroz Basa, Portfolio Manager at Old Mutual Investment Group's Electus Boutique, high dividend yielding stocks offer better investment opportunities in this pressured economy. Well, he joins us now for more. Feroz, perhaps you can tell us why you believe so and why you make these statements.
FEROZ BASA: Hi, guys. Obviously, I run the Old Mutual high yield opportunity, so I am a bit biased. If we just look at the overall economy and we look at where the stock market is there is a slight disconnect. The market yield is currently around 17 times. That is high if you look at the average over the longer term. If you also look at the overall economy, we look at unemployment rates, we look at the subdued economic environment, and we look at the indebtedness of the consumer they don't quite tie in nicely. If you look longer term, we're probably going into a low return environment and in that low return environment, I think companies that focus on cash flow, maximising their returns to investors via dividends; those are the companies, which give you your boost in the low return environment.
ALEC HOGG: It's interesting that you say that, Feroz. The ArcelorMittal Chief Executive – outgoing Chief Executive Nonkululeko Nyembezi-Heita – when she was in the studio, she said to us that the returns she saw in 2006/2007/2008 – those weren't normal. Those were abnormal. The current returns, which are substantially lower, are the new normal. I'm not sure if you've had a chance to look at Standard Bank's results, but there's a similar thing there where they're coming from ROE's of 25 percent…now its ROE's of 15 percent. So lower profits I guess, means lower share prices and lower returns.
FEROZ BASA: I think that's a very good point you make. The returns have been abnormal. What we actually do, is we go back even further. We look at the last ten years where average returns were around 13 percent, then you look at the long-term average of over 50 years, and it's closer to eight percent, so I'm glad you actually brought up Standard Bank. That tells you returns over the last ten years have been abnormally high, and it's largely explained by uplifting the global economy. We saw China doing well. They're a resource-based economy and obviously, we benefitted from that significant boom via commodity shares. Commodity prices went up, our mining companies benefitted and in turn, the economy benefitted as a whole. When we look at the low return environment going forward, companies that produce significant cash flows, have good high values to entry, where valuations look attractive…they give you that additional boost because your share price appreciation is not going to be that significant and you get that from the dividend. Just relating that back to Standard Bank today, where we see…it's counterintuitive in a sense. ROE's have come down significantly. Obviously, we're in a highly consumer-indebted environment, and yet the dividend was increased in excess of 20 percent in Standard Bank, so that places them on a yield in excess of five/six percent. You can see the share price is reacting today, based on that performance, so it is a bit counterintuitive. For example, with the banks; when they don't grow they have too much capital, which they don't have to deploy and the additional portion of that capital, they give to shareholders, and we are then able to maximise on the returns.
ALEC HOGG: Feroz, just a quick one: there were changes in the index last night on the high yield index. Are you going to be adjusting portfolios accordingly? The share, which is particularly interesting, is Oceana.
FEROZ BASA: I actually don't look at the index, Alec. What I look at is…we've gone back over time – and I only buy equities – so when we looked at the index track-type funds, it was very dangerous because we have a valuation underpinned in our portfolio. It's an actively managed portfolio. For example, Oceana we think – cyclically – the earnings are too high, yet the dividend yield looks attractive. However, we don't have that in our portfolio, so I don't necessarily look at these indexes and I don't do the adjustments. A very good example to give you is some of these index funds…when African Bank, before it fell significantly was at R38.00 to R40.00. The dividend yield was six-and-a-half percent. It was probably four/five percent in some of these index tracker funds. We had zero based on our bottom-up analysis that the share was overpriced, based on the bubble we saw in unsecured lending and we had zero. We therefore don't follow these indexes. We follow the All Share Index dividend yield and we offer clients one-and-a-half times the All Share dividend yield. We therefore try to maximise that without taking too much risk in buying shares that we think are expensive, which aren't high dividend yields.
GUGULETHU MFUPHI: Feroz, for the average man on the street, how should they evaluate which shares to invest in, when it comes to a high dividend yield?
FEROZ BASA: I think that's a very good question, Gugu. The average man on the street doesn't look at the market all the time, so saying 'I'm going to buy shares with a high dividend yield' is a very dangerous strategy if you're not actively managing your portfolio from the bottom up. Obviously, some of these companies…when the share prices fall significantly, the dividend yield then looks attractive because obviously, if they haven't changed the dividend policy it looks attractive. However, some of those share prices…there are reasons for those falls and the layman won't have that information because he doesn't look at the market all the time. My suggestion is this: if clients think this is a good strategy… I can tell you, going back in our funds since launch, you know we have a number of clients who have benefitted significantly from this – buying these unit trust funds where they get access to a portfolio manager, and they get a spread of shares that reduces their risk, is a better option for them.