Dividend Investing: The low down

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:

1. 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:

See attached

2. 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 overtime 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:
See attached

3. 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.
See attached
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.

4. 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.
5. 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.