To beat inflation, investors should focus on strategies that use dividends as a contributing factor in their share portfolio, to realise long term returns. This is according to Grant Meintjes, Head of Securities at PSG Wealth during a recent investment webinar.
Designing your share portfolio
Investors must determine what they are willing to invest in and whether this investment would be local or international. “It is critically important for investors to consider the potential risk of any given investment opportunity and compare it to the potential reward – a simple cost to benefit analysis,” says Meintjes.
Some important factors to consider include your age (and the point at which you are planning to deploy your capital), the amount you have available to invest, your projected capital needs and what other resources you have available like existing discretionary investments or long term savings vehicles.
Most investors are classified as either conservative or aggressive. “Conservative investors tend to prioritise protecting their capital and maintaining the value of their investment,” Meintjes explains. “The aggressive investor is comfortable with a medium to high degree of risk and can stomach year-to-year fluctuations in exchange for potentially higher long term returns.”
Finally, during the process of constructing your portfolio, keep diversification in mind. “Your capital should be hedged against the risks in certain sectors by being invested across different sectors,” Meintjes says.
Making your investments
“A basic distinction to make when discussing the use of dividends in your investments is the one between ordinary shares and preference shares,” Meintjes continues. “The way these shares award investors dividends is the main difference between them. With ordinary shares, a company chooses whether to pay a dividend of earnings or to employ the capital elsewhere.”
Ordinary shares can be broken down into various sub categories. These include:
• growth shares (ones that increase in value faster than the rest of the market)
• income shares (which pay dividends on a regular basis)
• value shares (shares that become available for prices lower than their true value)
• blue chip shares (known for steady, stable growth over the long term)
• defensive shares (companies that aren’t affected by economic swings, like food retailers and utility providers)
• cyclical shares (those that are affected by economic swings)
• speculative shares (or penny stocks – unpredictable, but potentially highly rewarding shares in new, smaller companies)
Owning a certain company’s preference shares entitles you to a dividend of earnings, which the company is obliged to pay.
“To decide which to invest in, you must consider a share’s fundamentals,” Meintjes says. “These include qualitative and quantitative data used to determine a share’s intrinsic value.”
Is the company’s revenue growing, is the company turning over a profit, how strong is the company’s competitive advantage and how much debt does the company hold? These are a few of the questions you want answered before deciding where to invest.
Maintaining your portfolio
“The best advice to offer a new investor with regards to their share portfolio: try not to be overly concerned with the day to day performance of the individual shares,” Meintjes says. “Let your investment grow, don’t sell any shares within the first year, keep your purpose clear in your mind, think long term and plan to not touch the capital for at least five years.”
“You should also make sure that your portfolio is sufficiently diversified,” Meintjes says.