A goal many in the “financial independence retire early” movement strive for is to have a stock portfolio just churning out dividends that allow them to leave the drudgery of their day job behind and sail off into the sunset.
Retirees of the normal 60-something age also desire a steady stream of dividend income from their nest eggs to cover day-to-day living expenses, so one would think the Satrix Divi Plus ETF would be a popular choice. But it’s worth taking a bit of a deeper dive before hitting the “buy” button.
First, let’s consider the yield on the Satrix Divi Plus ETF, which currently stands at 5.41%. On the face of it, this seems pretty decent, considering most people are working on drawing down 4% of their capital to cover annual living expenses. With a slightly higher dividend yield, you get the required yield with some to spare. Or you can invest less of your capital upfront to achieve the same desired yearly income due to the higher yield.
Another point to consider about the Satrix Divi Plus ETF is that it invests only in South African equities listed on the JSE, which pay out dividends in rand, so you won’t have to worry about currency translation of those payments. In retirement most people want certainty rather than surprises. If your living expenses are all in rand, it makes sense to get your dividends in rand as well, which removes the foreign exchange risk from your actual income.
I like getting South African dividends through the ETF as it means the 20% withholding tax is deducted at source and no further income tax is liable once in the investor’s hands. This can be powerful tax strategy if you know your marginal tax rate is going to be higher than 20% in retirement, as it can lower your overall marginal tax rate. The 20% tax is paid directly to the South African Revenue Service, eliminating the need for additional budgeting for tax payments when filing provisional or annual tax returns. It makes for a cleaner, more straightforward tax return process than with real estate investment trust distributions, which are taxable in the hands of the investor and create future tax liabilities, possibly at a higher marginal tax rate than 20%.
The Satrix Divi Plus ETF pays out on a quarterly basis, which is probably not ideal given that most retirees have spent the past 40 years working off a monthly income and monthly budget. While getting used to a different time frame is not an insurmountable hurdle, it does detract somewhat from the offering when compared with RSA Retail Bonds or an annuity, for example, which can both pay out monthly.
One of the differentiating aspects of the Satrix Divi Plus ETF is that, according to its website, it consists of 30 companies that are expected to pay the best normal dividends over the coming year. “The selection of the 30 shares is therefore not based on the market capitalisation of the shares, but rather the ability of the company to pay superior dividends.”
If your living expenses are all in rand, it makes sense to get your dividends in rand as well
Most high-yield or dividend ETFs and unit trusts tend to construct dividend or income portfolios based on stocks with a long track record of paying dividends, the so-called “dividend aristocrats”, which tend to remain in the portfolio for extended periods. But the Satrix Divi Plus ETF strategy incorporates active management, portfolio turnover and market timing, all of which have their pros and cons, with implications for overall performance.
We all know that investing is about total return, not just dividends. Looking at the latest fact sheet for the Satrix Divi Plus ETF, we see a five-year annualised return of 13.04%. In comparison, the Satrix Top 40 ETF has returned 15.94% over the same period but yields only 2.83%. Therefore, you are giving up a nearly 3% annualised return to get a higher ongoing dividend yield from the Satrix Divi Plus ETF, which doesn’t make much sense.
Looking at a one-year and three-year time frame, the annualised return differential between the two ETFs is even more pronounced, with the Satrix Divi Plus ETF significantly underperforming the JSE Top 40 ETF. Now, all that might change in the future, but we can only look at the current factsheets for investment decisions we need to make today, bearing in mind the old mantra: past performance is not a guide to future performance.
The total expense ratio for the Satrix Top 40 ETF is also noticeably less than for the Satrix Divi Plus ETF, at 0.1% and 0.41% respectively. A 0.3% fee spread over a 25-year retirement adds up to a decent chunk of fees and potential performance drag.
The Satrix Divi Plus ETF is a realistic option but it’s worth looking at other options and strategies with a financial adviser to see what alternatives are available.
Tobin is the founder of Coffee Microcaps
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