This has been the worst year on the JSE since the 2008 global financial crisis. Unless something extraordinary happens in the next few weeks, 2018 will be the first year in a decade that the market has delivered a negative total return.
Even through the lean period since 2014, the FTSE/JSE All Share Index (Alsi) has at least managed to eke out a positive performance each calendar year. The return of 2.6% in 2016 was, until now, the lowest figure since the drop to -23.2% in 2008.
It is worth bearing in mind, however, that the positive return in 2016 was entirely due to dividends. Without them, the Alsi actually fell from 51 324 to 50 653 over the course of the year.
There is a slightly longer term story here too. Over the last five years, reinvesting dividends would have been responsible for more than half of the return from the local market.
Where there is still growth
Figures provided by Johan Gouws, head of institutional consulting at Sasfin Wealth, show that without dividends the Alsi would have grown just 18.75% in total since 2013. Adding dividends into the equation lifts that total growth to 37.7%.
As Dave Mohr and Izak Odendaal from Old Mutual Multi-Managers noted last week, it is also significant that even as share prices have struggled over the last few years, dividends have still grown.
“At an index level, dividends have grown 14% per year over the past 20 years,” Mohr and Odendaal pointed out. “The most recent five-year period, with weak commodity prices and a tough domestic economy, has still seen dividends grow 8% per year.”
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According to FTSE Russell, the dividend yield on the Alsi was at 3.64% at the end of November. That is near historical highs. The yield on the market was at 4.1% when it bottomed in 2013.
As the table below shows, even if dividends grow at just 10% per year from here, the nominal value of the yield from a R1 000 investment in the Alsi will almost match the yield of 6.5% one could currently get from a money market account within six years.
|Dividend yield versus money market yield|
|Year 1||R1 000.00||R36.40||R1 000.00||R65.00|
|Year 2||R1 000.00||R40.04||R1 000.00||R65.00|
|Year 3||R1 000.00||R44.04||R1 000.00||R65.00|
|Year 4||R1 000.00||R48.45||R1 000.00||R65.00|
|Year 5||R1 000.00||R53.29||R1 000.00||R65.00|
|Year 6||R1 000.00||R58.62||R1 000.00||R65.00|
|Year 7||R1 000.00||R64.48||R1 000.00||R65.00|
|Year 8||R1 000.00||R70.93||R1 000.00||R65.00|
Regardless of where share prices go, if you are reinvesting those dividends, you are buying more shares, and therefore increasing the yield you receive. Essentially, you are compounding your return using the cash that companies are paying out to shareholders.
The bigger picture
The impact of this is even greater when one removes the biggest contributors to market performance in recent years. Over the past three years, the Alsi has grown 5.99% at an index level, excluding dividends. However, if one strips out the contributions of Naspers, Richemont, Anglo American, BHP Billiton, Sasol and Mondi, everything else is actually -5.03% down.
Reinvesting dividends changes that picture. Even stripping out those top performers, the Alsi is positive over the last three years when dividends are reinvested.
The graphs and tables below illustrate the impact of dividends in more detail.
Dividends have therefore clearly been a saviour for local investors, but it’s not only on the JSE where they play such a significant role. Earlier this year, global asset manager Schroders looked at the impact of dividends on returns from the MSCI World Index over the last 25 years.
“If you had invested $1 000 on 1 January 1993 in the MSCI World, the capital growth would have produced a notional return of $3 231 by 7 March 2018,” Schroders noted. “Annually, that represents a growth rate of 5.9%.”
This figure almost doubles when dividends are taken into account.
“By reinvesting all dividends, the same $1 000 investment in the MSCI World would have produced a notional return of $6 416, representing annualised growth of 8.3%.”
That difference of 2.4% a year compounded over 25 years is meaningful.
“Dividend reinvestment is one of the most powerful investment tools available,” noted Schroders fund manager Nick Kirrage. “As our research shows, the potential difference to the rate of return [that] dividend reinvestment makes could be substantial. Over time, those seemingly small amounts reinvested can grow into much bigger sums if you use them to buy even more shares that pay dividends in turn.”