Mayhem, blood on the streets, global meltdown - no term would be an exaggeration to describe what happened on world stock markets this week.
And no one can really tell us whether this is the end of it all.
The market turmoil is a disaster for many millions of South Africans. Those with lots of debt or high exposure to equities - particularly if they are near or in retirement - will feel the pain.
But for those with money in the bank, now may be the time to consider buying equities, albeit very selectively and cautiously.
In my view, the main reason for buying shares is to take advantage of the profits that publicly listed companies pay in the form of dividends. And the less you pay for a share relative to the profits earned and distributed, the more you score.
And the sooner you buy the shares and the longer you hold onto them, the greater the profits you will earn in proportion to what you paid for the shares.
Watch dividend yields
This proportion, or ratio, of a share's price to dividends is called the dividend yield. When the prices of shares across a market or a market sector drop, dividend yields increase, based on the last dividend paid divided by the new share price.
Dividend yields can be misleading, particularly during times such as those we are experiencing now.
There is widespread talk of a recession or even a depression. A downward spiral in an economy, and particularly the global economy, results in fewer people being employed, less money being spent on goods and services, manufacturing companies making fewer goods and so needing fewer resources. The result is that most companies make lower profits.
So a share you buy today that has a dividend yield of, say, eight, will come down in price when the next round of profits is reported and a lower dividend is declared.
Here are three examples of what the meltdown has done to dividend yields since the FTSE/JSE All share index peaked in May:
- Anglo American had a dividend yield of 1.7 percent on May 22. On Thursday this week, it was 4.1 percent.
- Rembrandt Group had a dividend yield of 2.2 percent on May 22. On Thursday this week, it was 10.5 percent.
- Old Mutual had a dividend yield of 4.1 percent on May 22. On Thursday, it was 7.4 percent.
Once you have bought a share, it does not matter what the future price of the share is relative to the dividend paid. Your dividend yield will always depend on the dividends paid. So if profits increase, so will your dividend yield. But if profits fall, so will your dividend yield.
It was the anticipation of a fall in profits that badly affected stock markets this week.
In previous weeks, the main downward driver was the fear of failure by banks that have a high exposure to high-risk home loan borrowers (the subprime debacle) in the United States. Banks in turn have not had the money to finance borrowing by companies to provide goods and services or consumers to fund purchases.
Turnaround - but when?
Eventually, however, things will have to turn around. People need to eat, they need shelter and they aspire to an ever-better lifestyle. Companies will again make sound profits. This means that dividends will again improve.
But you can expect share prices to rise ahead of anticipated increases in profits.
Investors who buy shares when they hit rock bottom will benefit the most from long-term dividend flows (they will receive the best future dividend yields).
The problem is that no one can predict where rock bottom is. Normally, it is when there is a lot of low volatility, as started to happen on some markets this week. In other words, the prices are up slightly one moment and then down again the next.
But no one knows for sure because there could still be further shocks to the system despite all the measures taken by developed economies this week to make credit more freely available by cutting interest rates by half a percentage point, providing guarantees on inter-bank lending and propping up failing banks.
One thing is certain: it will take some time, probably years, for stock markets to return to the record levels achieved in May.
The point is that if you have cash available, it is probably time to start investing in quality, dividend-paying companies. A few words of caution:
- Do not borrow money to invest, particularly now, because markets could still drop further and take time to recover.
- Do not invest money that you will need in the short term in the hope that you will make a quick profit. Again, share prices could drop further and/or take time to recover.
- Don't invest all your money in one lump sum. Phase in your investment over a few months. Prices could still drop further.
- If you don't know much about shares, invest via a collective investment, such as a unit trust fund or an exchange traded fund (see "ETF will select top-paying stocks for you").
ETF will select top-paying stocks for you
If you have neither the time nor the ability to select shares that will have attractive dividend yields in the future, there is an investment vehicle that can do so for you: an exchange traded fund (ETF) called the Satrix Divi.
An ETF is a security listed on a stock exchange that invests in other companies. But an ETF is also a collective investment, like a unit trust fund, that pools the money of many investors.
An ETF manager does not select the companies that he or she believes will out-perform; an ETF is a passively managed collective investment that tracks an index.
The Satrix Divi, which was launched in August last year, tracks the FTSE/JSE dividend index, which mathematically selects companies that pay sound and sustainable dividends.
The Satrix Divi pays dividends quarterly and completed its first annual cycle on September 30.
Based on historical dividends (over the past 12 months) and prices on Tuesday, the Satrix ETFs are at their highest dividend yields.
On Tuesday, the dividend yields for the Satrix Divi were 5.4 percent; the Satrix 40 (which invests in the 40 biggest companies listed on the JSE) was at 3.4 percent. The Satrix Indi (the 25 largest industrial companies on the JSE) was at 2.2 percent and the Satrix Fini (the largest 15 financial companies on the JSE) was at 5.6 percent.
But these yields were calculated based on the profits made over the past 12 months.
Mike Brown, the chief executive of Satrix, says that although the Satrix Fini currently has the best historic dividend yield, the Satrix Divi has an advantage in that it is more diversified than the Satrix Fini. This reduces volatility risk (the propensity to swing in value).
The Satrix Divi has 37 percent of its portfolio invested in banks, and insurance and financial services, while the Satrix Fini is 100-percent invested in that market sector.
The Satrix Fini has dropped by 33.5 percent over the past year (October 7, 2007 to October 7, 2008), against the 22.4 percent decline in the Satrix Divi over the same period, indicating lower risk.
Brown says although there is no guarantee that present dividends will be maintained, the major companies in the Satrix index portfolios should be able to maintain their dividend payouts.