A dividend is money that a company pays to its owners. When a company makes money, it can choose to either put it back into itself in order to grow, or to distribute it to its owners in the form of dividends. Many companies usually do a bit of both.
Making money from shares
There are two main ways you can make money from shares. The first is by selling your shares at a higher price than you bought them for. The second is by earning money from the dividends the companies pay out.
If you buy a company’s shares, you become a part-owner and are entitled to any dividends the company pays. Most companies pay dividends once or twice a year.
Not all companies pay dividends
Some companies may not pay dividends for a number of years. This is mainly the case with major international technology companies. These companies usually reinvest all their profits into the business to drive growth. You generally have to rely on the growth in the value of your shares to make any money from those shares.
Tax on dividends in SA
In South Africa, tax is charged on dividends in the hands of the company. This tax is currently at a rate of 20%. In other words, if the company declares a dividend of R1 for every share you hold, you get R0.80 after the tax deduction. The tax will be deducted by the company before they pay the balance to you.
If the idea of paying a 20% tax on your dividends sounds painful, then you might want to consider using a Tax-Free Savings Account that is invested in ETFs (Exchange Traded Funds).
For other interesting investment options, have a look at What can I invest in – the ultimate investment map.