Dividends are a portion of company profits paid directly to shareholders at regular intervals, serving as a key component of investment returns and a sign of corporate health.
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Dividends are a form of investment return paid at regular intervals directly to shareholders out of company profits. In some cases, companies may issue special once-off dividends, which are not tied to regular profits but often result from surplus cash or asset sales.
Paying dividends incentivises shareholders to retain their capital investments in the company.
If a company has a record of paying good dividends, it tends to make the shares more attractive to investors.
But companies are under no obligation to pay dividends. They could also use the profits to:
- Reinvest in the company to generate further profits;
- Acquire other businesses or equipment or staff;
- Repay debt; or
- Buy their shares back from shareholders.
The company’s board of directors will decide what is best for the company, taking into consideration how it can deploy any profits to expand the business, what other companies are doing and its need to retain bigger, wealthier investors who are likely to buy and hold shares that pay good dividends.
Most South African companies strive to pay dividends – generally larger more mature companies pay out more of their profits in the form of dividends compared to smaller or faster growing companies.
If dividends are declared, the board must approve the decision.
Older, more established businesses typically pay dividends or buy back shares, while younger, faster growing companies typically retain profits to reinvest and grow faster. Investors are often prepared to stay invested to enjoy the strong growth without receiving dividends.
However, when companies start paying dividends, investors expect to receive them in future. When a company suspends its dividend payouts, investors often take this as a sign that the company’s profits are under pressure and the share price tends to fall.
How are dividends paid?
Dividends are paid on a per-share basis and can be paid in cash or as additional shares also known as scrip dividends.
South African companies typically pay dividends in cash and are less likely to offer scrip dividends. When a company offers a scrip dividend, generally shareholders have the option to take cash instead.
Companies set their own dates for paying dividends, but these are typically paid monthly, quarterly or annually.
The date on which the dividends are declared is known as the declaration date, and payment usually happens after that date.
The stock market or exchange on which the company’s shares are listed will decide on what is known as an ex-dividend date, and anyone who owns shares on that date will be entitled to the dividends when they are declared.
If you are a shareholder in your own name, the dividends will be paid to you in cash.
If you are an investor in a unit trust or exchange traded fund, you will be asked when you invest if you want to be paid the dividends or if you want to reinvest the dividends. If you reinvest the dividends, the cash paid to your fund manager will be used to buy more units in the fund.
Unit trusts and exchange traded funds set their own distribution dates, which are independent of the dividend dates of the underlying share holdings. Some funds, such as income funds, may pay out monthly. Others, such as equity funds or funds invested in foreign markets, pay out quarterly or twice a year.
Why are dividends important?
Dividends are an important part of long-term total returns you earn from shares or funds invested in shares.
Over the past 30 years to the mid-2025, for example, dividends have accounted for more than 41% of the total return from the FTSE JSE All Share index.
If the company has a good track record as a reliable dividend payer, you have some certainty that you will receive at least this portion of the expected return, even if market sentiment negatively impacts the company’s share price.
Reinvesting dividends can compound the growth of your investment more quickly – you will earn returns on the investments the dividends buy you in future years.
If you need an income stream – for example, if you are a retiree living off your investments – dividends can be paid to you regularly and can provide an inflation-proof income.
Dividends can also mitigate the effects of a market downturn on your returns – you will be paid the dividends on the basis of the number of shares you own and not on the basis of the price of the shares.
Looking at a share’s dividend paying history can also help you decide whether to invest in a share or not.
Shares that pay good dividends that grow at or above-inflation are often solid blue-chip companies that are more defensive in times of low growth.
Should you reinvest or take the dividends in cash?
If you want to grow your investment for a future goal, for example, when you are saving for retirement, you should reinvest the dividends to maximise the growth and the compounding of that growth.
If you are looking for an income from your investments, you may want to take the dividends as an inflation-proof income.
How do you measure dividends?
Data providers publishing information about listed shares are likely to provide the dividend per share and dividend yield of each share.
The dividend per share shows the dividends paid over the past year.
The dividend yield is the dividends paid over the past year per share divided by the share price and will fluctuate with the share price.
The dividend pay-out ratio shows the percentage of the company’s net income paid out in the form of dividends. The JSE says wise investors look for a ratio of less than 70%, indicating that the rest is reinvested to grow the company.
Did you know?
The average dividend yield of the JSE All Share over the past 30 years to mid-2025 is 3.3% a year – making up more than 40% of the average return of 8% a year over this period.
The average annual dividend yield of the S&P500 over the past 30 years to mid-2025 is 2% a year, making up less than 20% of the 10.4% return a year over this period.
Data provided by Marriott
This article was first published on SmartAboutMoney.co.za, an initiative by the Association for Savings and Investment South Africa (ASISA).
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