Low interest rates suck for savers, but you still have options
- Conservative South African savers who are looking for income are being hit by historically low interest rates, making favoured vehicles like money market accounts much less attractive.
- Companies are also cutting their dividends during the pandemic, making for a double whammy.
- But there still are some investment options for people with cash who need an income.
- For more stories, go to www.BusinessInsider.co.za
* This article has been updated below.
South African savers looking for a low-risk investment that will deliver a steady stream of income have rarely had it this bad.
After yet another cut, interest rates are at their lowest level in almost half a century, making favoured vehicles such as money market accounts far less attractive. Meanwhile, dividends – the part of profit that companies pay out to shareholders – have also dried up. Dozens of South African companies have suspended these 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 diminished for years to come.
Those who want the safety of a bank deposit can – with careful choice – still find solid returns, especially if they can afford to remain invested for a long time. African Bank, for example, is offering 10% 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.
These are two alternatives to keeping cash in a bank account where interest rates are suddenly not that great.
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 to offer a relatively solid return to investors. In other countries, interest rates are negative.
You can typically invest in local bonds via unit trusts. Or you can invest directly into RSA Retail Bonds, which are issued by government and currently offer 8% a year (or you can choose to receive 5% plus the inflation rate) over a period of five years.
According to founder and director of investment website JustOneLap.com Simon Brown, RSA Retail Savings Bonds are a low risk way of making money.
This is because government bonds become an attractive asset class to invest in when interest rates are low.
“On the long-term bond they are offering an 8% payment and they pay biannual or quarterly if you are over 65,” said Brown.
That compares to around 6.4% delivered by money market unit trusts over the past year – though interest rates have dropped significantly since the start of 2020, so that kind of return looks unlikely over the next year.
Another option is preference shares, which are another form of relatively low-risk investment and are linked to a company’s stock with dividends paid out to shareholders before regular dividends are issued, says Brown. 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. 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, preferred shareholders are entitled get payment from company assets first in the event of a bankruptcy.
Or bundle them together with income funds
Savers looking for a low-risk investment can take the guess-work out of the equation by turning to income funds, says PSG Wealth's Schalk Louw.
These are usually recommended to those who need to protect their capital against erosion first, and who are looking for income second.
The funds tend to invest in both bonds and preference shares, as well as other conservative assets such as property and money markets.
"Both asset classes also provide the further addition of possible long term capital growth," says Louw. "The optimal mix of these four asset classes will be determined by the nature of the fund and the fund manager’s strategy, but capital growth is much more limited compared to shares and balanced funds."
* This article was updated after publication to add that historic money market performance is not likely to be repeated in the coming year, and to add income funds to the list of options.
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