This year, as part of Money Smart Week South Africa, we’ll be looking at some of the ways your money can work for you – from earning interest and receiving dividends to potentially growing in value over time.

Under this year’s theme, “Money Smart: The Power of Possible”, we’ll unpack how understanding different investment options, interest rates and sources of returns can help you make more informed decisions about your money and your financial goals.

One of the key areas we’ll explore is how investors can think about generating income while also considering the potential to grow their wealth. This includes looking at passive income from dividend-paying shares and interest earned through fixed-income investments such as bonds.

Understanding the impact of interest rates

Interest rates are an important part of this picture. When inflation rises, central banks may increase interest rates to help bring price increases under control. Higher rates can make borrowing more expensive for consumers and businesses, but they can also increase the income available from certain savings and fixed-income investments.

How interest rates affect bonds

Interest rates can also affect the price of bonds. Generally, when market interest rates rise, the prices of existing bonds with lower fixed interest rates can fall because newer bonds may offer more attractive rates. This can present an opportunity for investors to buy existing bonds at a lower market price, depending on the bond and its maturity. Conversely, when interest rates fall, existing bonds with higher fixed rates can become more valuable.

JSE-listed banks and interest rates

Higher interest rates can also affect banks. Banks lend money to consumers and businesses and earn interest on those loans. When interest rates increase, so do the loan rates, and as a result, banks can potentially generate more interest income, depending on their funding costs, loan structures, and the broader economic environment. This can potentially support bank earnings and, where profits and capital allow, create greater capacity to return cash to shareholders.

“While savings accounts on average typically offer returns of between 6% and 8% annually, some bank shares have delivered more than 100% in share-price growth over a five-year period. In addition to this potential capital appreciation, several banks have also increased their cash dividends, giving shareholders the potential to benefit from both capital growth and dividend income,” Nilan Morar, our VP of Trading, explained.

Passive income & fixed-income investments

This highlights the difference between earning income from cash or fixed-income investments and investing in shares for potential income and capital growth. "Fixed-income investments can provide more predictable interest income, depending on the product and its terms, while dividend-paying shares can provide passive income but with no guarantee that dividends will be maintained or increased.  Nilan added, "Share prices can also rise or fall, meaning investors take on market risk in exchange for the potential for capital appreciation."

For bank shareholders, stronger earnings could potentially translate into higher cash dividends, depending on each bank’s dividend policy, profitability, and capital requirements. If the market also responds positively to stronger earnings, the share price could rise, creating a potential capital gain alongside dividend income. This means investors could potentially benefit from two sources of returns: passive income through dividends and capital growth.

Making the most of the “Power of Possible”

Ultimately, being money smart means understanding how different types of investments can play different roles in a portfolio. Fixed-income investments can provide regular interest income, while changing interest rates can create opportunities in the bond market. South African Government Bonds purchased through the TFSA and RA accounts offer investors another way to access fixed-income investments within these tax-efficient accounts.

Dividend-paying shares can potentially provide passive income and capital appreciation. Understanding inflation, interest rates, bond prices, risk, and the potential sources of return can help investors make more informed decisions about how to grow and protect their wealth – bringing the “Power of Possible” theme of Money Smart Week to life.

*Past performance does not guarantee future performance 

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