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Beware: This ‘top' dividend paying ETF will cut its dividends in 2015…

by , 13 April 2015

ETFs are the greatest aren't they?

They make it easy to start investing with as little as R250 a month.

They take all the ‘guesswork' out of investing and give you average (yet very good) performance year in and year out.

Whenever a new investor wants to stick their cash into an ETF the question is always “which one?”

And time and again the Satrix Divi pops up.

It's simple really - the Satrix Divi lets you invest in the top dividend paying shares on the JSE.

But there's a catch…

And if you don't heed my warning today you could end up without the big dividends the Satrix Divi promises this year - and your ETF might underperform.

Let me explain…

Satrix Divi is staring another ‘ABIL’ episode right in the eyes

The Satrix Divi index is determined by merely looking at the dividend yield of companies on the JSE.

Last year when African Bank (ABIL) crashed the Satrix Divi index continued increasing it’s holding in the share.

Until eventually African Bank went bust.

This happened because of a single, but deep flaw with the index.

It works ONLY on hindsight…

For example:

If a share is selling for R200 and it paid a R10 dividend last year its dividend yield is 5%.

Now the market realises the company is headed for trouble. It won’t be able to pay a dividend next year. So the share price drops 50% to R100. But because no new financial results are out yet the Satrix Divi index still continues using the old dividend amount of R10.

So with the share price now down to R100 the dividend yield seems to be 10%. Even though analysts are certain that the company won’t pay a dividend when next it releases results.

But, in this case the Satrix Divi index sees the share as MORE attractive because its dividend yield increased from 5% to 10%.

The Satrix Divi index would now include more of that share in the index.

And that’s exactly what happened in the case of Africa Bank.

But even more perplexing is the fact that the same thing is happening all over again.

Satrix Divi is stocking up on shares that will cut their dividends this year!

Since the start of the year Satrix Divi has increased its resource shares from 11% of the index to 33%.

At the same time it’s decreased its holdings in financials from 43% to 32%.

This happened as resource shares crashed but their historical dividends made their dividend yields look good.

But they WILL drop when these companies next report results.

The top holdings in the Satrix Divi portfolio are Assore, Sasol, Kumba Iron Ore and Anglo American. Assore and Kumba Iron Ore are both plagued by the fact that the iron ore price has dropped from $180 to around $50 in a bit more than a year.

Kumba had a dividend of R23.34 in the past year. I expect this dividend to crash to R11.50 this year and drop even lower in 2016, Assore will follow the same path…

Then there’s Sasol.

We all know the oil price just crashed hectically…

And Sasol makes money when the oil price is high. When it is as low as it currently trades at – Sasol is in trouble.

At the current oil price Sasol will only just be profitable. Its R400+ share price won’t last much longer if oil stays below $60. And if profits drop – the dividend will drop as well…

Anglo American owns 69% of Kumba Iron Ore. So any difficulties at Kumba translate right through to Anglo as well. So considering my expectations for Kumba, things don’t look too bright for Anglo either.

Being a contrarian pays – but you can’t be too early

Sure, the mining sector will turn from its current bear market.

But being a contrarian and buying it right now – especially as aggressively as the Satrix Divi has is very risky indeed.

I believe it’s still too early.

So what’s the answer then?

Well, look at the market sectors that are decent and then you should buy the ETFs that represent them.

We know the Satrix Resi is out because if we’re avoiding the Divi because it’s too resource heavy why buy the Satrix Resi that’s down 19.52% in the last year?

Rather buy a mix of:
  • Satrix Indi (Industrial shares like Steinhoff, Aspen, Bidvest and Mr Price form part of this index), this index has returned 23.23% a year on average for the past 10 years and,
  • Satrix Fini (financial companies like First Rand, Sanlam, Growthpoint Property and Discovery form part of this index), this index has returned 16% a year on average for the past 10 years .

Here’s to unleashing real value

Francois Joubert

Editor, Red Hot Penny Shares

Beware: This ‘top' dividend paying ETF will cut its dividends in 2015…
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