Lourens Coetzee | Investment Professional at Marriott
- 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
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.
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.
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.
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.