You must think I’m crazy for saying this, but maybe it’s time we welcomed this status. What if South Africa’s downgrade status is the beginning of the end? And, what if this downgrade is in actual fact an investment opportunity?
Let’s look at Brazil.
Because of Brazil’s large budget deficit and political turmoil, it was downgraded to ‘junk’ status by the Fitch credit ratings agency on 16 December 2015.
But guess what?
Brazil’s stock market is now one of the best performing in the world! In fact, it’s nearly triple the performance of the JSE…
So, just like the Brazilian market, the South African market could also perform better
Another example is when S&P and Fitch ratings agencies downgraded South Africa’s status from from BBB stable to a BBB negative rating in 2015. This was one move away from junk status. Within four days the rand hit R15.38 to the dollar from R14.35 til it hit R16. But by early February the rand started to strengthen again. So, as much the downgrade seems to be a shocker, things stand to get a lot better in the near future. And, that’s why, you need to look at investing in shares – dividend paying shares.
There are a number of quality growing shares hit hard because of negative sentiment. But, before you dive in, here are a few ways you can avoid bad dividend payers.
What to watch out for when buying dividend paying shares
For a company to pay dividends, it has to be able to afford the payout. However, when a company’s dividend payout rate is higher than the growth rate, this could cause the company’s share price to fall and eventually closing its doors. So, here are four ways you can avoid unsustainable dividend payers.
1. Research on the management team
Try to look for companies where management own a large portion of shares. When they own most of the shares, they want to grow the business. Furthermore, ensure that the management team has a good proven track record of managing successful businesses.
2. Ensure the dividend payout ratio is less than 70%
This ratio is the fraction of net income the company pays in dividends. So, if they keep it below or on 70%, they can hold on to the earnings they needs to grow the company.
3. History is a good teacher. Check out past dividends!
It’s always advisable to look back at the company’s history. This will help you see whether the dividend payout ratio is consistent. Also, try to avoid companies that increase dividends too quickly.
4. Avoid companies that use debt to pay dividends
Do your homework. Stay away from companies with cash flow problems or low profits but still pay dividends. They are in financial trouble if they are using debt to pay dividends.