The dividend yield on the JSE all share index has been rising in recent years as the markets have drifted sideways. It has become a more important factor for investors who have given up on capital appreciation as an incentive. A dividend yield signals a company that has real hard cash with which to reward investors.
Since 2000, the yield (dividends as a percentage of share price) has more than doubled to its current level of just over 4%, but it is still a long way off its high of almost 11%, achieved in the early 1980s market crash .
In the days of the equity cult (like the 1990s bull market), many companies took pride in not declaring dividends, stating that they knew better than the shareholders what to do with any cash that was generated . Some even said a dividend payment was an admission of failure.
That has all changed in recent years, as investment opportunities have largely dried up .
Over time, if a company has demonstrated its worth, the dividend yield will tend to fall, all other things being equal. This is one of the reasons blue-chip stocks tend to have relatively low dividend yields, especially in times like this when investors are looking for quality companies with strong capital growth.
The companies most often shunned - small and medium-cap stocks - tend to have the highest dividend yields. The larger companies, which make up the bulk of the all share index, offer comparatively low yields. That skews the averages. Unweighted, the average yield comes in at 7%.
Fund managers and investment analysts have paid little attention to small-cap stocks, as they tend to be riskier investments and don't generate a lot of brokerage. But the Top Performers table (page 147) shows that a number of smaller-cap companies that have either turned the corner or have consistently produced good results are showing high yields.
At the top of the table, dividend yields are respectable. Mvelaphanda's (2) 33% is an anomaly of the past - its dividend yield is now under two. But microcap Pals (11), Metair (21) and Putco (19) have set a consistent long-term pattern.
Other gems are further down the table. One is Sun International (143), with a five-year average dividend yield of 19,5%.
Steers (115), the fast-food chain, had a setback in 2002 and cut the dividend slightly. Yet it still has a high dividend yield, as the share price remained under pressure.
Steers' earnings bounced back this year, as did the share price, and if the final dividend declared is in line with expectations, its five-year average dividend yield should still be in the region of 8%-9%.
Yet another is Hudaco (129), a distributor of engineering and auto-related parts. It's a quality small-cap company and yet its five-year average dividend yield is 7,3%. Its results released recently demonstrated that it could survive a weak rand and still grow earnings.
City Lodge (120) is reaping the benefits of growth in tourism, which looks set to continue for some time to come. Its five-year average dividend yield is 6,6%.
Property companies, too, traditionally offer high dividend yields as their main attraction to investors.
There are plenty more examples of high yields from quality small-cap companies.
Before investing in these companies, however, it's important to look beyond the numbers , as a high yield can sometimes seduce potential investors into making the wrong decisions.
