Dividends are key

Feel free to reach out to PSG Wealth Manager Schalk Louw directly.

When we look at some of the world’s most successful investors, Warren Buffett can definitely be described as someone who would probably thoroughly enjoy 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 17 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 , 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 regarding which shares currently find themselves in this index.

Sector-based, the largest portion of these shares currently come from the basic materials (33%), with energy stocks in second place (22%). The top 10 shares in the Divi+ Index makes up more than half of the entire index (55%). They are (according to size):

1. Thungela Resources
2. Exxaro
3. African Rainbow Minerals   Sasol
4. Truworths
5. Kumba
6. Sibanye Stillwater
7. Nedbank
8. ABSA
9. Amplats

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 underlying shares in the Divi+ could sing along with my father. Many articles have referenced the (broader) local market’s initially artificially good performance (thanks to Richemont’s weight in the FTSE/JSE All Share Index over the past year), which has since stabilised somewhat. However, this is not just a South African trend. When looking at the international stock market, you will find a similar situation, with the MSCI All Country World Index not only artificially boosted by U.S. companies but also,  upon closer examination, that seven U.S. companies were responsible for most of the global returns. These seven companies are not referred to as the Magnificent 7 in vain. Similarly, when comparing the Divi+ to its global counterpart, the S&P Global Dividend Aristocrats, it becomes apparent that high-dividend companies worldwide have lagged growth stocks.

Graph 2: S&P Global Dividend Aristocrats Index relative to MSCI All Country World Index (source: Datastream)

Back to the local front. The Divi+ Index has performed worse than the FTSE/JSE All Share Index (JSE) by more than 10% over the past year (up to 27 July 2023). However, things become very interesting from here on. As mentioned earlier, the Divi+ index is determined by the 30 stocks with the best 12-month expected dividend yields. If we adjust the expected dividend yields (source: Refinitiv Eikon) that currently make up the Divi+ Index according to their weights, it means that if the consensus expectations are 100% correct, this index should trade at an incredible 8% dividend yield over the next 12 months.

Graph 2: FTSE/JSE Dividend Plus relative to FTSE/JSE All Share Index 5-year returns (source: Refinitiv Eikon)

I want to conclude by emphasising that consensus expectations are only as accurate as they are inaccurate. 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 instead of paying dividends. Even Warren Buffet's company, Berkshire Hathaway, does not pay dividends, choosing to invest that capital instead. Does that make Berkshire Hathaway a bad company? Definitely not.