Dividend-focused investors buy dividend focused shares for their "good, consistent and increasing dividends"....right? But they may not be getting what they bargained for.
Here's a something I found surprising:
Using the Coreshares Global Dividends aristocrats ETF $GLODIV for illustration:
Historic yield = 1.78%
Expense ratio = 0.57%
To earn R10 000 in dividends in a year, you needed to have R561 978 Invested. The ETF provider would earn a cool R 3 202 in management fees. That's 32% of what YOU earned. 32%!! 😅
To upscale that, if you had R 5 619 780 invested, you'd have earned R100 000 in dividends, your ETF provider would be earning R32 020 in management fees
Mind-blowing. Right? Expected? You judge for yourself
To borrow from the adage "The number of properties you own is vanity, the cash flow you make is sanity and the cash you got in the bank is reality", I use the same approach when analysing investments.
What is the Vanity?
What is the Sanity?
What is the Reality?
Using this on the Coreshares Glodiv ETF:
The Vanity: The ETF returned growth of ~13% per annum since inception
The Sanity: Dividends are paid twice a year
The Reality: a 1.78% Dividend Yield, with almost a third going to the provider
Let me let you in on a little secret I have noticed amongst dividend-focused companies that make up dividend aristocrat ETFs, you can test this yourself:
A Dividend Aristocrat is a company that has a good history of paying consistent and increasing dividend over a certain number of years. The global dividend aristocrats index uses 25 years as a benchmark. The South African variation uses 7 years.
The individual companies have an extremely conservative dividend policy. This is to ensure that they are able to pay a dividend regardless of whether we are in a bull or bear market. This will allow them to keep their status as a "dividend aristocrat company.
A company can pay a dividend of R10.00 in year 1, R10.01 in year 2, R10.02 in year 3 and so on. In it's 25th year, it'll be paying a dividend of R10.24. This allows the company to qualify as a dividend aristocrat as it has paid increasing dividends consistently, albeit in 1 cent increments.
During years of good performance, instead of increasing the ordinary dividend, they may declare "special dividends" to reward their shareholders. This special dividend does not get included in the track record or the dividend payment history and will not set a new benchmark for future dividend payment expectations
During years of bad performance, companies that have a record of paying dividends may be forced to declare dividends from reserves in order to maintain their reputation, and to stop a sell-off from the holders of the shares. This is relevant amongst the institutional shareholders who may have the power to shift a market's sentiment against a specific company.
What's the alternative?
My aim of writing this post is not to sway you towards or away from certain investment instruments, but just to give you a different perspective when you are doing your research, help you evaluate situations in a different manner than usual.
Below I compare the $GLODIV vs $STXNDQ
What would I do?
Determine your income(dividend amount) requirements, e.g. R100 000 a year
Invest the capital in a money market account. at 8% interest, I would need to invest R 1 250 000 to earn R100 000 income
Invest the balance in an aggressive Global ETF like the Nasdaq100. In this case, the R4.3m left.
This could allow you to achieve better growth and income results
What's your take? Any other insights or lessons you want to add? Leave your comments below.
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