The rand
  • South African savers are starved for choice as they search for proper, low-risk returns.
  • Interest rates are ultra low, and dividends from property companies and other sources have dried up.
  • You can still get more than 9% from a bank account if you commit for long periods - but an expert advises against it.
  • For more articles, go to www.BusinessInsider.co.za.

South Africans looking for low-risk options to earn decent interest or income from their investments have rarely had it this bad.

The monetary policy committee kept interest rates at a half-century low last week, which is grim news for savers. Two of the five committee members actually voted for a rate cut, which means rates could stay lower for longer – or could even fall further at the next meeting, if only one of the other members change their mind.

Ultra-low interest rates don’t only affect the rates you earn on a savings account, but also drag down returns from other low-risk investments in the money market and bonds.

That’s bad enough, but in a perfect storm, other income alternatives have also dried up.

Dividends – the part of company profits paid out to shareholders – have been diminished as many South African companies suspend their payouts as they try to survive the shock of the coronavirus crisis.

Property shares, and the unit trusts that invest in them, used to pay out juicy amounts of cash. But these companies have been among the hardest hit in the coronavirus crisis, and their payouts may be weaker for years to come. 

So, where do you go if you want to park a lumpsum for a while and don’t want to risk losing any of it, while earning some income from it?

Bank deposits

Those who want the safety of a bank deposit can - with some homework - still find relatively okay returns, especially if they can afford to remain invested for a long time.

African Bank, for example, is offering 9.2% per year if you are prepared to leave it in a fixed deposit account for 60 months. If you invest R100,000 into the account, and withdraw monthly, this will earn you R798 per month.

At Capitec, a lumpsum of R100,000 fixed for 49 months and longer, will earn you almost 8%.

For shorter periods of three months, you can earn an annualised rate of around 5% with African Bank and Capitec.

At this moment, Schalk Louw, portfolio manager and strategist at PSG Wealth, favours shorter-term 32-day notice deposits – rolling those over, renewing every few months - rather than fixing at a long-term rate, over 60 months for example. He believes that rates may start to head higher faster than many people think, and that you may risk committing yourself to a lower-than-necessary rate if you fix your investment amount for too long.

While local inflation is still subdued, and monetary policy committee members are still voting for a cut, the Reserve Bank’s own models show that interest rates should start to rise in the second half of the year.

Louw says there are indications that interest rates overseas – which are currently near or below zero in many major markets - may start to rise sooner than expected, which could force SA rates higher as well.

Bonds

A bond is like an IOU, with the borrower agreeing to repay an amount plus interest. Countries issue government bonds, which promise to repay an amount at a fixed rate of interest at a specific time. 

With government finances in a really bad state, South African bonds have had to offer a relatively solid return to investors to compensate for the risk.

You can typically invest in local bonds via unit trusts, which should have earned you almost 9% last year (minus what you’re paying in fees). It is not guaranteed (nor expected) that bonds will earn the same returns this year, however.

Alternatively, you can invest directly into RSA Retail Bonds, which are issued by government and currently offer 7.25% a year (or you can choose to receive 4.75% plus the inflation rate) over a period of five years. 

Money market

The money market is where governments and companies go to borrow money over the short term.

Typically, the money market should offer higher interest rates than long-term government bonds, but this was not the case last year. Unit trusts and accounts that invested in the money market only returned 5.4% last year.

Preference shares

Another option is preference shares, which are also relatively low-risk investments and are linked to a company’s share price with dividends paid out to shareholders before regular dividends are issued. They pay a dividend that is linked to the prime rate.

Most of South Africa's large banks have issued preference shares.

But they are not entirely without risk.

“Two tips with preference shares,” says founder and director of investment website JustOneLap.com, Simon Brown. The one is that your capital can decrease. It’s not like money in the bank. In other words, you could invest R10,000 and end up with R8,000. Secondly, there is the risk of the business going bankrupt.

“For example, African Bank had preference shares when they went bust in 2014, and if you were holding that preference share, you got nothing. There is a higher risk with preference shares but also a much higher reward,” Brown said.

Unlike ordinary shareholders, however, preferred shareholders are entitled to get a payment from company assets first in the event of a bankruptcy.

Unit trusts that invest in a range of low-risk, interest-earning investments

Savers looking for a low-risk investment but don't know how to choose between bonds, the money market and similar investments, can take the guess-work out of the equation by turning to unit trusts like income (or “interest bearing”) funds, says Louw. The funds tend to invest in both bonds and preference shares, as well as other conservative assets such as the money market. 

The funds are usually recommended to those who need to protect their capital against erosion first, and who are looking for income second. 

Super dividend payers

Investing in shares is riskier than the other alternatives listed above – you can lose some of your initial investment if the share price falls. But some large companies are now paying proper dividends that should be considered by those who are looking for income, according to Louw.

The large banks have stopped paying dividends following the advice and gentle guidance of the Reserve Bank, who wants them to conserve their capital amid the pandemic. Louw doesn’t expect that banks will resume dividend payments this year.

And while other large companies have also frozen dividend payments, there are still a couple who have maintained steady payouts.

Louw singles out the asset manager Coronation and the cigarette maker British American Tobacco, which now offer you a return (dividend yield) of around 7% to 9% on your investment in the share.

Importantly – with inflation at risk of eating most of your income, it’s key that you pay close attention to how much fees and tax you will end up paying on your investment of choice.

Compiled by Phumi Ramalepe and Helena Wasserman

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