Understanding the Two Ways to Profit from Stocks
When investing in the South African stock market, there are two primary ways to earn a return:
✅ Dividends: Regular payments made by a company to its shareholders, usually from its profits.
✅ Capital Gains: Profit from selling a stock at a higher price than you paid.
Each method has its own advantages, risks, and tax considerations. Successful investors often use both to maximize returns.
What Are Dividends?
A dividend is a portion of a company’s profits distributed to shareholders.
- How It Works:
- Usually paid quarterly, semi-annually, or annually.
- Expressed as a Rand amount per share or as a percentage yield.
- Usually paid quarterly, semi-annually, or annually.
- Example:
- If a company declares a dividend of R5 per share and you own 100 shares, you’d receive R500.
- If a company declares a dividend of R5 per share and you own 100 shares, you’d receive R500.
Benefits of Dividends:
✅ Provides steady income, especially from large, stable companies.
✅ Acts as a cushion during market downturns.
✅ Can be reinvested to buy more shares (compounding effect).
What Are Capital Gains?
Capital gains arise when you sell a stock for more than you paid for it.
- Example:
- You bought shares of Sasol at R400 each and sold them at R500.
- Your capital gain is R100 per share.
- You bought shares of Sasol at R400 each and sold them at R500.
Benefits of Capital Gains:
✅ Offers the potential for high returns, especially in growth stocks.
✅ Allows you to capture profits during strong market trends.
Dividends vs. Capital Gains: Which One Should You Focus On?
It depends on your investment style and financial goals:
- Income Investors: Prefer dividends for stable cash flow.
- Growth Investors: Seek capital gains by focusing on stocks with growth potential.
- Balanced Approach: Combine both strategies for diversified returns.
Dividend Policies in South Africa
South African companies vary in how they distribute dividends:
- High Dividend Payers: Typically found in mature industries like financials, utilities, and telecommunications (e.g., Vodacom, Standard Bank).
- Low or No Dividends: Often growth companies that reinvest earnings into expansion (e.g., some mining or tech stocks).
Be sure to research each company’s dividend history and payout ratio before investing.
Tax Considerations
Understanding taxes is crucial for maximizing returns:
- Dividends Tax:
- In South Africa, dividends are subject to a 20% withholding tax before reaching investors.
- In South Africa, dividends are subject to a 20% withholding tax before reaching investors.
- Capital Gains Tax (CGT):
- When you sell a stock, profits are subject to CGT, currently at an effective rate of up to 18% for individuals (varies based on total income).
- When you sell a stock, profits are subject to CGT, currently at an effective rate of up to 18% for individuals (varies based on total income).
Tax-efficient investing helps you keep more of your gains.
Tips for South African Investors
✅ Reinvest Dividends: Consider a dividend reinvestment plan (DRIP) to buy more shares and compound returns over time.
✅ Set Realistic Goals: Combine dividend-paying stocks and growth stocks to balance income and long-term growth.
✅ Watch for Ex-Dividend Dates: To qualify for a dividend, you must own the stock before the ex-dividend date.
Common Questions from Investors
Q: Are dividends guaranteed?
A: No. Companies can reduce or suspend dividends during financial difficulties or uncertain market conditions.
Q: How often are dividends paid in South Africa?
A: Typically semi-annually, but some companies pay quarterly or annually. Check each company’s policy.
Q: Is it better to focus on dividends or capital gains?
A: Ideally, blend both based on your risk appetite and income needs. Dividends offer steady income, while capital gains can boost overall returns.