When markets are booming, investors often forget about the importance of dividends in their portfolio. However the recent trading update from retailer Woolies, proves why dividends are such a critical part of your investment strategy.
For those not familiar with the concept of a dividend, this is a share of the profits that are distributed to shareholders either quarterly, half-yearly or annually – depending on the policy of the business.
Both Investopedia and Allan Gray make the point that more than more 50% of your investment return is likely to come from dividends.
Woolies proves this point.
On 16 January 2018, Woolies released a poor trading update which saw the share slump 6%. If one goes and pulls a graph for Woolies over 5 years, the share will be down … 6%.
In other words if you have held the share for the last 5 years, your capital is actually down without taking into account inflation.
If you had been analyzing the business and its offshore expansion plans, you could have taken profits when the share was on the way up to R104.90 but for the purposes of this exercise, let’s look at the investment through the 5 year cycle.
A -6% return on capital is poor but the below makes for interesting reading
| Full Year Dividends Declared** | |
| 2017 | R3,13 |
| 2016 | R3,13 |
| 2015 | R2,47 |
| 2014 | R2,51 |
| 2013 | R1,23 |
| Total dividends for the period | R12,47 |
At the current share price of R59,53 the dividends have contributed 21% over the period. 21% over 5 years is not going to shoot the lights out, but it’s a far better performance than the -6% on the capital. That the dividend has more than doubled over the 5 year period and is forecast to grow to R3.89 in the next 2 years, highlights the value of dividends in your portfolio.
For those who follow Woolies, the company has some company-specific challenges which have knocked the share price but each business will come with its own unique challenges.
If you can enjoy consistent dividend growth – either through shares or Exchange Traded Funds (ETFs) – you can build a meaningful long-term portfolio and mitigate much of the risk.
If you would like assistance in building a dividend-focused portfolio (either local or offshore), please complete the form below or e-mail marc@decusatio.co.za and one of our problem-solvers will contact you.
** All dividends are pre-tax.
