Monthly Dividend Portfolio
Who doesn’t want a dividend portfolio paying monthly?
We originally published this article in May 2022 and have updated it again as some dividends disappear and the RSA Retail Savings Bonds and Bond ETFs offer great yields right now.
When the household wallet is getting the squeeze, having an additional source of income to supplement your retirement income is a real win. As we’ve seen in previous blog posts, these sources of income can be a hobby that earns you a bit of cash or an extra room in your house or second property that you can rent out.
Another option for an additional source of income is a portfolio that receives monthly dividends. I shared this neat idea in this newsletter, which led to a number of JOLers enquiring about the details of such a portfolio.
In this blog post, I explore the theoretical possibility of constructing such a portfolio for the local market.
We also have a post looking at offshore ETFs that pay monthly dividends.
Go for stable
What’s really important is that you only want stable dividend payers. This means no cyclical commodity stocks and the like. Sure, they have great dividends right now, but they’ll disappear when the cycle turns down again. It’s also worth keeping the biggest investing lesson from the pandemic in mind: Even the most stable dividend can vanish in a heartbeat and we’ve seen that recently with Spar (JSE code: SPP) canceling their dividend, Pick n Pay (JSE code: PIK) cutting theirs and Coronation (JSR code`: CML) also canceling theirs due to a SARS dispute, all this is the last few months. I did a podcast on disappearing dividends here.
Bonding with bonds
One easy option is RSA Retail Savings Bonds. They’re currently offering a 11.75% fixed return for 5 years (you can reset it higher if rates rise). The issue here is that you’re earning interest and as such, it’s taxed as income above the exemption limits (R23 800 per year for taxpayers under the age of 65, R34 500 per year for taxpayers aged 65 years and older). There is also no capital appreciation so the amount paid every month remains the same. This means it’s ultimately falling behind inflation. To fix this they have an inflation-linked bond that offers CPI + growth. Here the capital grows at CPI and interest on that capital is then paid out which is currently at a record CPI +5.25% for ten years.
As mentioned, bonds have the drawback of tax on interest paid and listed REITs (Real Estate Investment Trusts) pay income directly. So depending on your tax situation the 20% tax on dividends may be a better option to reduce your tax liability every year.
Choose wisely
Selecting the companies to invest in needs to be based on quality and sustainable dividends, not just recent payments. Here, for example, we could pick any of the four large banks. They all pay dividends in the March/April and September/October periods. This highlights another important point: There’s a difference between interim and final dividends. Final dividends are usually larger, sometimes as much as 2x or even 3x the interim dividend.
But here’s a cunning trick – FirstRand has a June year-end so their September dividend is larger, whereas the other three banks have a larger March dividend. For this reason, it’s attractive to put Standard Bank and FirstRand together as they respectively have December and June year ends.
Example
The example below is just that: An example. It’s also lumpy. You could smooth payments with different sized positions in each stock to try and achieve the same Rand value payout.
Theoretically, the portfolio example below could generate payments increasing ahead of inflation every year with the bonds being the exception.
But wait, there’s more
Rochelle, our May personality of the month, did a great review of her favourite ETFs where she mentions an offshore ETF paying monthly dividends. Read all about it here.
But why change anything?
In an ideal world you buy a stock, take the regular dividends and do nothing unless something collapses.
The portfolio below needed some updates as we saw some ETFs exit and some dividends cut. However we’ve also seen yields increase on Nepi Rokcastle and British American Tobacco as the Rand weakens offering better Sterling and Euro dividends.
The PREFTX no longer exists as preference shares are disappearing so I have replaced with the new CSYSB from CoreShares which expects a 12.5% yield. If you held the old preference share ETF it was switched into this new one.
I wrote late last year that “the Pick n Pay yield is frankly also now looking weak and this is one switch I would consider, kick out Pick n Pay and bring in Coronation”. Then Coronation skipped their interim completely and Pick n Pay cut the dividend but the yield went up as the share price has fallen markedly.
So I keep Coronation as the dividend should return with the year end and Pick n Pay is doing just fine if buying now.
Lastly, only the Vodacom yield has actually fallen, the rest are all higher as prices fall and dividends mostly move higher.
Month |
Stock |
Yield* |
|---|---|---|
January |
CSYSB | 12.5%*** |
February |
British American Tobacco** | 8.5% |
March |
Nepi Rockcastle | 8.4% |
April |
Standard Bank (F) | 6.9% |
| Firstrand (I) | 5.3% | |
| CSYSB | 12.5%*** | |
May |
British American Tobacco** | 8.5% |
June |
Vodacom (F) | 5.5% |
| Coronation (I) | 0% | |
| Pick n Pay (F) | 4.7% | |
July |
CSYSB | 12.5%*** |
August |
British American Tobacco** | 8.5% |
September |
Standard Bank (I) | 6.9% |
| Nepi Rockcastle | 8.4% | |
October |
CSYSB | 12.5%*** |
| Firstrand (F) | 5.3% | |
November |
British American Tobacco** | 8.5% |
December |
Pick n Pay (I) | 4.7% |
| Coronation (F) | 0% |
* This is the yield for the full year based on the previous twelve months of dividends, excluding special dividends. Price is from the close Monday 19 June 2023.
** Sterling dividend paid in Rands
*** Expected yield
(F) – Final (usually larger) & (I) Interim (usually smaller)
Last thought, far from perfect science, but point of the exercise is to show how to put together a dividend portfolio paying monthly, certainly it is possible.
Retire blog
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, Carina Jooste responds to common retirement questions, ranging from which products are best suited to different circumstances to efficient tax treatments.