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The case for offshore remains compelling

15 May 2015

Lourens Coetzee | Investment Professional at Marriott

KEY TAKEOUTS:

  • Improve the quality of your portfolio
  • Low interest rates enhance dividend appeal
  • Globally diversified companies produce stable income streams

Demanding equity valuations and a subdued outlook for growth in South Africa suggest investors may need to increase their offshore exposure to ensure an acceptable investment outcome.

The case for offshore equities remains compelling as it is possible to purchase some of the largest and most recognisable companies in the world on dividend yields higher than South African alternatives. These attractive dividend yields afford investors the opportunity to diversify internationally while improving both the quality and income-producing capacity of their portfolios.

COMPELLING DIVIDEND YIELD DIFFERENTIAL

The chart below highlights the dividend yield differential between a selection of quality international companies and the dividend yield of the South African All Share Index.

Graph-Marriott-1

Equities are also attractively priced relative to bonds and cash in first world markets. Very low interest rates mean investors can currently receive more income from equities than government bonds and cash. This is a rare occurrence as equities, unlike bonds, also provide investors with income growth, which ultimately translates into capital growth. It could therefore be argued that there is no place for bonds and cash in an international portfolio, as the inclusion of these asset classes will reduce both the yield and the expected capital growth from the portfolio.

The chart below compares the dividend yields of Proctor & Gamble, Nestlé and Johnson & Johnson with the yields of the US 10-year Treasury and US cash.

Graph-Marriott-2

FOCUS ON THE RIGHT COMPANIES

To ensure income growth from an equity portfolio in the current volatile economic environment, investors need to be more selective. An investment strategy based on restricting equity exposure to those companies that produce reliable dividend streams is likely to deliver a more predictable outcome. These companies tend to focus on selling basic necessities, enjoy global distribution and have strong balance sheets. They also have track records demonstrating an ability to grow their profits and dividends irrespective of interest rate or business cycles.

The table below highlights the dividend growth produced by Marriott’s international equities in 2014.

5703-Fundamentals-May-2015-17

cocacola

nestle

johnson

In summary, the investment case for first world equities remains compelling as the dividend yields of high quality multinational companies are currently higher than those of first world bonds, as well as South African equities. South African investors are encouraged to diversify internationally and improve both the quality and income-producing capacity of their portfolios.

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  • Marriott
  • Fundamentals