Pref shares offer hope of beating inflation – Absa

Depressed interest rates put retirees and income-dependent investors at the mercy of inflation and tax, but preference shares could offer some respite.

The tip comes from Absa Investments, a value-based asset manager that serves many leading pension funds and is close to the needs of many conservative investors looking to beat inflation.

Craig Pheiffer: General Manger: Investments, Absa Asset Management Private Clients, points out: “In the current low-interest-rate environment there is an ongoing struggle for yield.

“Cash and bond yields are low and the interest earned on those investments is taxable, as is the interest earned on listed-property.

“The perpetual preference shares listed on the JSE which currently pay tax-free dividends linked to the prime interest rate are an alternative source of income available to investors who can tolerate some level of capital risk.”

By mid-June, at least one preference share portfolio had achieved a dividend yield of about 7.25% before fees and transaction costs – giving some hope of withstanding the ravages of inflation, currently at about 5%.

The challenge facing investors who simply want to stay ahead of inflation was highlighted by total return indices for the year to mid-June.

“With the year almost halfway through the steady returns of cash have outperformed the JSE, but have underperformed the other asset classes,” notes Pheiffer.

“Cash as represented by the STEFFI Composite index returned 3.24%, with the total return of the equity market virtually zero for the period (0.23%). The surprise rate cut earlier in the year helped lift bonds to a 5.78% return, with prime-linked perpetual preference shares returning 7.03%.

“Top of the heap were South African property stocks with a total return of 9.33%, but much of the return from cash, bonds and listed property is in the form of interest and so returns post-tax will be lower. Equities will always be the place to be for longer-term returns ahead of inflation but prime-linked preference shares have historically yielded an after-tax income in excess of the inflation rate.”