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Two offshore ETFs with dividend yields

The beauty of dividends is cash flow – even if the market is down.

MARC ASHTON: Welcome to the Moneyweb offshore investing podcast. My name is Marc Ashton and today I’m joined in studio by Simon Brown. Simon thanks for joining us.

SIMON BROWN: Thanks Marc, appreciate it.

MARC ASHTON: Today we’re talking dividends and I think as a South African investor everybody knows the Satrix Divi – it’s been a nice performer, it’s been really solid. If you wanted yield, it’s been a nice easily accessible product. Take us through some of the offshore investment opportunities for those who are not familiar with offshore ETFs which offer dividend yields.

SIMON BROWN: There are a couple and I’ve picked on two because they’re probably better known. The one comes from Charles Schwab which is a brokerage in the US, but they also offer a lot of products such as ETFs and mutual funds and the like. They’ve got a particular holding which is the SCHD which is their US dividend equity ETF. Just as an aside it has an expense ratio of 0.07% … just crazy, crazy cheap in that regard.

What I really like about it, is it’s a company that’s paying dividends – there are issues around US dividends and I’ll touch on that in a moment – they are a strong company. They’re generating cash, they’re confident. So Schwab is holding Proctor and Gambol, Pfizer, Johnson and Johnson, Verizon, Microsoft, Intel, Coca-Cola…it almost sounds like a Warren Buffett holding in a sense.

The other from BlackRock is in iShares Core High Dividend etf (HDV is the code), again a very low total expense ratio, and again similarly they’ve got Wells Fargo in there, Philip Morris, Merck & Co, and also Coca-Cola. I like the stocks that they’re holding. Solid quality…you almost want to call them boring, but boring is exciting in the market.

MARC ASHTON: Any stand-out performers there?

SIMON BROWN: From what we’ve seen in terms of the performances, they’ve both done about 16% to 18% in the last 12 months. That’s not a bad return. That excludes your dividend yields. In both cases your dividend yields are around 3% – 3.5% so if you add that in, you’re touching around 20%. Some of your stocks within it … Microsoft has had a fairly decent year in terms of Satya Nadella, the new CEO; the new concept behind Microsoft has got it fairly excited. And then of course your drug manufacturers. I’m always a fan of healthcare.

MARC ASHTON:What do we need to think of? You were talking about taxes just now, if you were thinking about doing offshore investing, you start comparing Satrix against some of these ETFs, you’re looking at say 3.3% dividend yield on Satrix at the moment, probably around the same level, but you’re talking foreign currency earnings?

SIMON BROWN: You’re talking foreign currency earnings which is important. These are giant global players, AT&T. We’ve got MTN and Vodacom and we’re very proud of them as South African home-grown companies but compared to AT&T they’re but a drop in the ocean. So there’s going to be that offshore exposure – that rand exposure, that true global exposure in developed markets rather than what we see with MTN, more into the emerging market space.

There’s an interesting point on the tax issue. US dividend tax is 30% and in South Africa its 15%. Now someone who has a WebTrader account must go to globe tax…must apply for relief at source. It costs you $35 for three years, and you’ll only pay 15% – we’ve got a tax treaty with the US. But it does mean a lot of these companies are paying a little less back in dividends and perhaps using that money for share buybacks which helps the share price go up, simply to avoid that extra tax on the dividends.

MARC ASHTON: Big question though at the moment: we’re looking at global markets and thinking gee maybe they’re starting to look at little bit toppish at the moment. A lot of people are talking about the potential for a crash or at least a sharp pullback next year and we got a bit of a scare until China came in and injected a bit of liquidity a couple of weeks back. Are you a dividend investor and what is the power of a dividend over the long-term?

SIMON BROWN: Well, will our market crash? Yes it will. Will it be next year? I’ll tell you in a years’ time. No one knows and I would vote no, but in truth I don’t have a crystal ball either. The beauty of dividends is that’s cash flow that’s coming back, and even if the market is down, a nice dividend pay is paying you back some dividends. The yields increase because prices go down markedly, and that cash flow can be withdrawn for lifestyle etc. It can be used to reinvest into a market that’s trading at a cheaper opportunity.

So I think a lot of folks don’t focus on dividend. I think a lot of times your first few dividend cheques might not be very impressive, but dividends are massively powerful…and what I love about them is that cash flow they generate me so that I can go buy more of the same, or go and buy something else.

MARC ASHTON: So South African investors who are worried about not necessarily getting the dividend yield out of the local products, may want to look at the international market.

Simon thanks very much for joining us in the studio.

SIMON BROWN: Always a pleasure Marc.

** This is a sponsored education series focused on offshore investing. The content is sponsored by Standard Bank WebTrader and Moneyweb are the content creator.

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