Due to the compounding effect, equities can create phenomenal growth — but only if there is a source of growth.
Investing in equities presents one with a unique advantage over other asset classes, which in my experience is rarely understood and almost never discussed. Equities can compound in value in a way that investments in other asset classes, such as bonds and real estate, cannot. The reason for this is quite simple: companies retain a portion of the profits they generate to reinvest in the business.
If you look at companies in the major indices, such as the S&P 500 or the FTSE 100, you will find that on average companies pay out about half of their earnings in dividends. The earnings that are not paid out are invested in the business. No other asset class provides this.
If you own bonds, you receive an interest payment but it is not automatically reinvested in the bonds. The only exception to this is so-called payment-in-kind bonds issued by highly leveraged companies, which provide the option for them to issue more bonds if they are unable to pay the cash coupon. So you get more bonds but only at a moment when the last thing you want is for your interest payment to be invested in more of this junk. Similarly, if you own real estate, you will receive rental income but none of it will be reinvested in property for you.
Denne historien er fra 24 August 2017-utgaven av Finweek English.
Start din 7-dagers gratis prøveperiode på Magzter GOLD for å få tilgang til tusenvis av utvalgte premiumhistorier og 9000+ magasiner og aviser.
Allerede abonnent ? Logg på
Denne historien er fra 24 August 2017-utgaven av Finweek English.
Start din 7-dagers gratis prøveperiode på Magzter GOLD for å få tilgang til tusenvis av utvalgte premiumhistorier og 9000+ magasiner og aviser.
Allerede abonnent? Logg på
THE HEALTH OF SA'S MEDICAL SCHEMES
As the Covid-19 pandemic abates, finweek takes a look at the financial performance of some of the largest players.
The effect of Gilbertson's departure
With Ntsimbintle Holdings now the major shareholder of Jupiter Mines, it could change SA’s manganese industry.
Making money from music
Why investors are increasingly drawn to the music industry.
Conviction is key
Sandy Rheeder plays a critical role in Mukuru’s mission to open up financial services to the emerging consumer market in Africa through tailor-made technology solutions and platforms.
The post-pandemic toolkit
How CFOs can use technology to support growth.
Big city living exodus
Mini cities like Waterfall City and Steyn City are redefining city-style apartment living.
Big compact, big value
Handsome, with a hefty level of standard specification, the roomy Haval Jolion compact crossover is a great value proposition.
On barriers to entry
There are various ways in which a company or sector can achieve competitive dominance. They usually make for good investments.
Fear and greed in one index
To buck the trend, when markets are hot or cold, is a tough thing to do. However, it can deliver solid returns.
Africa's largest data centre facility coming soon
Vantage Data Centers plans to invest over R15bn for its first African data centre facility in Attacq’s Waterfall City.