You are Here > Home > Podcasts > Listen: The low-down on dividend investing

Listen: The low-down on dividend investing

Nov 1, 2019

This week’s episode is part of our Investment Series where we focus on investing and specifically investing for a sustainable income. Maya and Mapalo chat to Lourens Coetzee and Duggan Matthews from Marriott about why investors are returning to a dividend-focused investment strategy. What are dividends and how can how they can be used to create a passive income?

The ability of a company to pay out steady or growing dividends is often a sign of a healthy business and a good long-term investment. These dividend payments can play an important role for investors.

A dividend is a payment made by a company to its shareholders and typically represents a portion of a company’s earnings that the directors of a business have decided to pay out and not reinvest back into the company.

The benefits of dividends are outlined below:

A source of income

Dividends provide investors with cash flows which can be used to fund lifestyle requirements or they can be reinvested. It is interesting to note that in first world markets at present, dividend yields of multinational blue chip companies are higher than cash and bond yields, making them an excellent source of current income.

The chart below compares the yields of a selection of multi-national blue chip companies to the 10-year US government bond yield.

Inflation protection

Companies that pay dividends provide investors with an effective inflation hedge. Take, for example, an investment made in Clicks Group Limited. In 2000 a R100,000 would have bought the investor 7 905 shares in the company. Those shares would have paid the investor approximately R1 400 worth of dividends in the first year. In 2018 that same investor would have received approximately R30 000 worth of dividends from the same number of shares. This increase in dividend income equates to an average annual income growth rate of 18.6% per annum for the past 18 years. This growth exceeded average inflation over the corresponding period by 13.2% per annum.

It is also important to note that the value of a company increases at the rate at which its profit grows. In the same way, the value of an investment grows over time at the rate at which its income grows. Clicks’ average annual capital growth over the last 18 years has been 16% which corresponds with the company’s 19% average annual growth in dividend over the same period.

The chart below illustrates Clicks’ dividend and share price growth since 2000.

Companies that reliably grow their dividends tend to outperform the market over time

Many investors think of reliable dividend-payers as stodgy, uninteresting companies that will produce mediocre returns. This is far from being the case. Studies have shown that companies which pay and grow their dividends outperform the market over the long term.

The table below highlights the relative outperformance over the last 20 years of some of the world’s best dividend-paying stocks when compared to the S & P 500 index.

Possible explanations for why reliable dividend-payers outperform include:

  • The inherent optimism of people which drives investors to overpay for exciting and high-risk companies with volatile dividends, and underpay for certainty;
  • The large percentage which dividend income contributes to an investor’s total return over the long-term; and
  • The fact that reliable dividend growth typically indicates that a company has a dominant brand, a strong balance sheet and a high degree of confidence that its earnings and cash flows will continue to support future payments.

Managing tax

In South Africa, dividends are taxable in the hands of the investor at a flat rate of 20%. This is an advantage for high net worth individuals in higher tax brackets.

Volatility

Investing in companies that pay reliable dividends helps to reduce volatility – when the company’s share price declines, the investor will still receive dividend payments.

At Marriott we fully recognise the important role dividends can play for investors in achieving their investment objectives. Our local equity fund, the Marriott Dividend Growth Fund, is managed to provide investors with a high level of dividend income that will grow faster than inflation over time. By investing in fundamentally-sound, JSE-listed stocks that have the ability to pay consistent dividends, the fund has delivered a reliable, inflation-beating income stream to its investors with an average distribution growth of 11% each year since 2000, exceeding inflation by approximately 5.6% per annum.

This post was sponsored by Marriott.

If you want to see the Johnson and Johnson chart that we mention in the podcast, here it is:

Johnson & Johnson

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *

Maya Fisher-French author of Money Questions Answered

Previous Articles

The top African tech unicorns worth watching

The experts at CMTrading take a look at some of the African tech unicorns that have reached the $1 billion mark, and what has made them worthy of the title. For those unfamiliar with online trading or venture capital terminology, the term “unicorn” is used to describe...

Listen: Global investing made easy

In this podcast Maya (@mayaonmoney) speaks to Warren Ingram (@warreningram), financial planner at Galileo Capital about his new book Global Investing Made Easy. Warren shares his insights into the investment decisions we make, and those we should be making.

SARS issues guidance on crypto assets

On 27 August 2021, SARS provided further guidance on the correct tax treatment of crypto assets and how this must be declared in people’s tax returns. SARS published a document on its website entitled Crypto Assets & Tax. The publication should perhaps best be...

High-risk land investment leaves angry investors out of pocket

Many South African investors who bought UK property developments through SA-based property marketing company SJ Capital, have seen no returns for over 11 years. Investigations have found that the investment is extremely high risk and that investors were not fully...

Listen: Top tips for financially savvy kids

Maya (@mayaonmoney) chats to certified financial planner Gugu Sidaki (@gugusidaki) about ways to skill our children so that they can better manage money as adults. Gugu is author of My 3 Piggies, a series of books for kids all about money. Also listen to this podcast,...

Listen: Juggling motherhood in the gig economy

Mapalo Makhu (@womanandfinance) rejoins Maya (@mayaonmoney) on the My Money, My Lifestyle podcast after taking a break to have her second child. She shares her experiences of having a child while having to meet client deadlines, and emphasises the importance of having...

Listen: Why insurers want us to be vaccinated

When it comes to understanding the risks in a society, insurers generally offer the best insights.  Insurance companies do not have to pay out for deaths that did not happen, and they will apply a risk rating to a behaviour or health status that they believe would...

Listen: Creating a passive income with shares

In this podcast, Maya (@mayaonmoney) chats to money blogger Brett (@ETFenthusiast) on how blogging helps keep him on track financially, his plans in working towards financial freedom, and which investments he is using to provide a passive income in the future.

You don’t need a lot of money to start investing

Many people feel they need to have a lot of money in order to start investing. In fact, the opposite is true. Investing small amounts every month actually provides the best risk-return scenario when it comes to longer-term investing. Investing via a monthly debit...

Retirement planning is not a once-off event

Jaco Prinsloo, Wealth Manager at PPS Wealth Advisory, has some sensible advice around retirement planning. As a wealth manager, I have observed that there are two typical clients. Some dread retirement, while others look forward to it. Those who dread it are the ones...

Pin It on Pinterest

Share This