We've covered dividend topics extensively in the past, from understanding what factors to look at when selecting dividend-paying stocks, to understanding how compound interest can work for you (from returns and dividend reinvestments). As well as informative dividend-related FAQ's that nobody really reads. We've decided to go back to basics and re-introduce dividends. In the first part of our my 'Dividends 2.0' series, I will be sharing what I believe you need to know about dividends and understanding the components in passive income.
What are dividends, how do I earn them and what can I do with them?
They are payments made by listed companies as well as certain Exchange Traded Funds, as a reward to shareholders for their investment. They are essentially your cut of the profits. Remember when you own shares you don’t just own them in the hopes of the price going up, you own a small share (hence the name) of the company.
Dividends usually get paid out of the net profit after taxes, and after part of that has been set aside in retained earnings for future expansion projects the company has scheduled.
Dividends can be paid either as a cash distribution or as a reinvestment. The default is usually a cash payment. For this you won’t receive any prior notification, you would simply log in to see the dividends paid into your EasyEquities account. If it is a share re-investment then our corporate actions team will contact you via email before the time to ask you to elect between receiving cash or receiving a reinvestment.
Do all companies pay dividends? Am I entitled to dividends simply by owning shares?
While companies often pay in good faith to keep their shareholders happy, they are not obliged to pay dividends. A substantial dividend payout can be interpreted in 2 ways: either it means the company is doing well and has profits to share. Or it means they don’t have any expansion projects on the horizon, which could signal a share price drop, sometime soon.
Larger, established companies (AKA Blue Chip Stocks) usually pay predictable, regular dividends whereas smaller companies, like a tech start-up for example, may not pay dividends as regularly as its profits are still volatile, even if it is making profits the company is likely reinvesting them into expansion projects.
How can I use my dividends?
Here’s what I might do with mine:
- Buy more shares through a re investment
- Buy shares in a different company
- Earn income and spend (On those important dividend dates 😉)
What about Exchange Traded Funds?
Not all ETFs have a distribution, some are total return funds. This means any distributions such as dividends and interest are re invested into the main pool of the fund, not paid out to shareholders.
Let's talk about tax baby
Dividend payments are subject to a dividend withholding tax of 20% for your ZAR stocks and 30% for USD stocks (SA citizens). We will first pay the gross amount into your account and then subtract the tax as a separate charge on your account.
Now that I am armed with knowledge about dividends, how do I know which companies pay them and when they will pay?