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Reasons to invest offshore

And the options available to investors.

In an uncertain global economic environment, investors are inclined to deviate from their financial plan and make impulsive investment decisions, often based on little more than an emotional reaction.

Globally, concerns around growth, a potential recession and intensifying trade wars have all weighed negatively on investor sentiment – and, as a result, on market returns. Locally, the outlook for the South African economy appears to be even more pessimistic, as GDP growth numbers continue to disappoint and a sovereign credit rating downgrade from Moody’s is becoming more imminent.

In this type of environment, the likelihood and cost of making incorrect investment decisions increases. As a result, investment outcomes become less predictable. The best way to increase the predictability of income and capital returns in volatile times is to invest in robust high-quality companies whose growth prospects are largely unaffected by economic, political or technological disruptions.

Highest quality found offshore

In our view, these companies tend to be offshore businesses, typically listed on first world exchanges. In particular, large, well-established, blue-chip multinational dividend-paying companies such as Johnson & Johnson, Unilever, Nestlé and Coca-Cola.

These companies are market leaders in their industries and have the best quality, strongest branded products that are integral to the lives of their customers. This gives them strong pricing power – the ability to increase prices without losing customers.

With a global footprint and trusted brands, these companies are best able to capitalise on long-term trends such as consumerism, ageing demographics and the fourth industrial revolution.

Reliable dividends

The combination of the above-listed traits enables these companies to deliver reliable growing dividend streams over time. The graph below illustrates this by highlighting Johnson & Johnson’s ability to grow dividends through various financial crises.

Source: Bloomberg

By taking a long-term view and investing in quality stocks that deliver predictable income, the capital takes care of itself, as demonstrated by Johnson & Johnson’s share price. This is based on the well-known premise that over the long term the primary driver of capital growth is income growth. Hence, if a company demonstrates the ability to deliver a reliable growing income stream, over the long term the capital value of the company will also grow reliably.

Attractive valuations

In a world of lower interest rates, these companies are becoming increasingly sought after. The graph below demonstrates the relative attractiveness of Procter & Gamble’s dividend yield versus the US 10-year government bond. What’s even more compelling is that companies like Procter & Gamble also have the ability to grow their dividends over time.

Graph: Supplied

The table below illustrates the dividend history of what we consider some of the highest quality offshore stocks as well as current valuations.

Stock

Consecutive dividend increases

Current dividend yield

Historic average dividend yield

Procter & Gamble

63

2.5%

2.4%

Johnson & Johnson

57

2.9%

2.2%

Colgate-Palmolive

55

2.3%

2.1%

Coca-Cola

55

2.9%

2.1%

Medtronic

41

1.9%

1.3%

Unilever

38

2.8%

2.7%

 Attractive valuations

The world’s best dividend-paying companies are currently trading at attractive valuations and will likely serve investors well in a world of low-interest rates and slowing GDP growth. 

Marriott Income Specialists was established in 1862 and acquired by Old Mutual in 2005. It is now part of the Old Mutual Investment Group.

The views and opinions shared in this article belong to their authors, cannot be construed as financial advice, and do not necessarily mirror the views and opinions of Moneyweb.

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COMMENTS   14

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I like it.

The local Global dividend ETF an even the Global Property ETF’s have performed well over the past year with some nice income.

What’s the full name of the local Global dividend ETF or who issues it?

Coreshares GlobalDivTrax. JSE Code GLODIV

Seriously? Over the past year?

I disagree.

Give us the figures year on year for September

Sorry. I mean for the year so far.

I am still trying to find an answer to a concern that I have:
In the event of a real disaster ala Zimbabwe what would the effect be on my global ETF’s?
I am investing my Rands: does the ETF actually own shares in Apple, or whatever, or only in a local vehicle that tracks the overseas price.
In other words if SA collapses do I have an asset worth something in a hard currency or something with a Rand value (or, then non value).
Any enlightenment will be appreciated!!

I use Coreshares Global dividend Aristocrats ETF and the S&P 500 ETF Index.
I have various holdings within the GLD Aristocrats ETF and S&P 500.

when the zar/usd rate depreciates then your etf’s (eg. s&p500 bought in Rands) will go up. If the Rand strengthened to R5/usd then your ETF’s would be worth a hell of a lot less. And yes ETF’s actually own assets, thats why they pay dividends, ETN’s do not.

Not entirely disagreeing but, based on the article, buying individual shares (not ETF’s) would be the answer. Not withstanding that, the reality is that either way, you will need to make quite a bit to offset the cost, what with broker fees, admin fees, management fees, advisor fees, tax, estate duty (if its not correctly set up), etc. – probably in the region of about 6 – 10% just to break even. Not to forget that the risk is entirely yours (as it always is). Oh, and did I mention escalating speculation that the world is heading for a recession. I wouldn’t rush into this willy-nilly, especially not with money that you can’t afford to lose.

coreshares have a low Annual cost effective fee hence I use them to buy my ETFs

Agree 100% with getting your money off shore, but why would you want to invest in a local etf, when you can so easily invest in a total off shore etf. Surely when this pays out in a few years the R1 000 000 000.00, it pays out will still only buy a loaf of bread? Surely it is better to get your funds out the country now and your payout will be in a first world currency?(I am sure this point of view will not be supported by a single financial adviser based in SA)

The best is an offshore ETF – But then you need to understand the tax issues – At the end of the tax year you have to apply the dividend exemption formula and convert all interest and rental income to Rands (unless of course you are in offshore endowment) and pay tax on that income or capital gain. Not as basic as local tax calcs.

There are pros and cons to both arguments. Total offshore on say an American market would only make a few % points a year, their markets don’t swing as wildly as ours do because of our wonderful Rands volatility. Now you may spend $1000 on a stock that increases 3% per year, which sounds bad to a South African because our basic savings accounts earn more, but to an American that’s good because their inflation is around 2%. You then can add that % into the devaluation of the USD/ZAR to get your true yearly earning on that stock. BUT… if the ZAR/USD strengthens then that can negate all your earnings. The Rand has depreciated around 6% per year for the last 30 years against the USD, a few points to think about, mainly what do you expect from your savings, then work from there.

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