Dividends and how you profit from them
When you buy shares, you take ownership of a percentage of the company. This ownership entitles you to a share of the company profits.
So – if company X has 1,000 shares in issue and it makes R10,000 profit this year that means each share is entitled to R10 of that profit. The company doesn’t necessarily pay out all of this profits as dividends though.
Typically, the dividend payout would be around a quarter to a half of the company’s profit.
So, the board might decide to pay out R5,000 of the R10,000 profits in dividends.
That means shareholders receive R5 per share in dividends.
If you bought 100 shares in the company, you’d receive R500 in dividends.
Companies can pay you twice, even FOUR times a year just for holding their shares
Companies typically pay a dividend once or twice a year.
These dividends coincide with financial reporting periods.
In South Africa companies report interim and final financial results. That means halfway through their financial year and at the end of a financial year. And at both these times the board of directors would discuss the possibility of paying a dividend to shareholders.
In the US companies report quarterly results – and they sometimes pay up to FOUR dividends. A handful of South African companies have also done this in the past.
Important terms to know when it comes to dividends
So, a company’s board decides on dividend payments when its financial results are finalised.
Once the announcement is made the company will release a number of dates that shareholders should take heed of:
- Dividend declaration date: This is the date the dividend was announced on
- Last day to trade: This is the last day you have to trade shares in order to get the dividend. If you sell your shares on this day, you won’t receive the dividend. If you buy shares on this day, you will receive their corresponding dividends even though you only held these shares a single day.
- Date of payment – This is the date the dividend is paid to shareholders. If you sold your shares the day following the last day to trade, you would still receive dividends on the payment date, even if you no longer own the shares.
No dividend paid? You need high growth in reward for holding the share
If you own shares in a company that doesn’t pay a dividend, you need to make sure that you get capital growth then. In this case, you’ll be looking to shares that the share price is going to appreciate quickly.
To get an idea on how the dividend paid out from a certain company compares to the rest of the market, look at the dividend yield. This is calculated by dividing the dividends per share by the price of the share.
The higher this number, the higher the dividend paid out is. Right now, the average dividend payout on the JSE is 4.36%. That means on a R100 share the dividend would be R4.36.
Sure, not all companies on the JSE pay dividends. But there are companies with dividend yields of 5%, 8% or even as high as 17%. You just need to know where to look!
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