Monthly Dividend Portfolio

We originally published this article in May 2022 and have received a number of requests to update it.

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 his 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.

Bonding with bonds

One easy option is RSA Retail Savings Bonds. They’re currently offering a 10% 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.

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 one exception: The CoreShares Preference Share ETF. This tracks the prime lending rate so the price of the ETF will be fairly static.

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 looks just fine and I have updated the dividend yields to reflect the data at close 25 November 2022.

Interestingly only PREFTX and Pick n Pay have seen their yields move lower. British American Tobacco is unchanged and the rest have all seen increased yields.

That 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. But a word of caution here, the impressive 11.2% yield will likely fall as the interim dividend was very chunky and likely to fall, but you’ll likely still get a 10% yield.

* This is the yield for the full year based on the previous twelve months of dividends, excluding special dividends. Price is from the close Friday 25 NNovember 2022.

** Sterling dividend paid in Rands

(F) – Final (usually larger) & (I) Interim (usually smaller)

Simon Brown

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.