A Guide to Dividend Investing With BROKSTOCK

Dividend investing is the cornerstone of long-term wealth creation, offering a dual benefit: the potential for capital appreciation and a regular income stream paid directly to shareholders. For both individual and corporate investors, a well-structured dividend portfolio can provide stability, income and sustainable growth.

This guide provides a comprehensive overview of dividend investing, from core metrics to advanced strategies, designed to equip investors with the knowledge needed to make informed decisions.

Understanding Key Dividend Metrics

To properly evaluate a dividend-paying company, investors should analyse four core metrics.

1. Dividend Yield

This metric measures the annual dividend income relative to the share’s current price, expressed as a percentage. A 5% yield indicates an annual return of R5 for every R100 invested.

●     Formula: (Annual dividend per share/Share price) x 100

An unusually high yield can indicate heightened risk or market concern that the dividend may be unsustainable. This is often referred to as a yield trap.

2. Dividend Payout Ratio

This ratio shows the proportion of a company’s earnings that is paid out as dividends. It is a critical indicator of dividend sustainability.

●     Formula: (Dividends per Share/Earnings per Share) x 100

A healthy payout ratio is typically below 80%. A ratio exceeding 100% signifies that the company is paying out more than it earns, which may not be sustainable in the long term.

3. Dividend Growth Rate

This metric tracks the annualised rate at which a company increases its dividend payments. A history of consistent dividend growth is a strong signal of a company’s financial health and confidence in its future earnings.

4. Payout Frequency

This refers to how often dividends are distributed. Payout schedules vary by market:

●     Semi-annually: The standard for most companies listed on the JSE.

●     Quarterly: The standard for most U.S.-listed companies.

●     Monthly: Less common, but favoured by income-focused investors. This is typical for certain asset classes, such as Real Estate Investment Trusts (REITs).

The Dividend Payment Process Dates

To ensure receipt of a dividend, investors must be aware of five critical dates in the payment timeline:

Dividend Taxation: Gross vs Net Income

A crucial aspect of dividend investing is understanding taxation. Companies declare a gross dividend, but investors receive a net dividend after taxes are withheld.

In South Africa, a 20% dividend withholding tax is applied to dividends from both JSE-listed and foreign companies.

●     Example: If Sasol (SOL) declares a R14.70 gross dividend, a 20% tax (R2.94) is withheld, resulting in a R11.76 net dividend.

Dividend Adjustments for CFD Trading

With contracts for difference (CFDs), dividends are handled through cash adjustments rather than direct payments.

●     Long (Buy) positions: If a trader holds a long CFD position before the ex-dividend date, their account is credited with a cash adjustment equal to the net dividend.

●     Short (Sell) positions: Conversely, if a trader holds a short CFD position, their account is debited for the dividend amount. This is because the trader is responsible for paying the dividend to the party from whom the share was notionally borrowed.

On the ex-dividend date, the underlying stock’s price typically drops by the dividend amount, which generally offsets the cash adjustment, ensuring the dividend event is neutral for both long and short CFD traders.

Common Dividend Investing Strategies

Investors have several potential strategies based on their financial goals:

Understanding the principles of dividend investing is the first step toward building a robust, income-generating portfolio. Whether the goal is current income, long-term growth or a combination of both, a disciplined approach to dividend investing can be a powerful tool for achieving financial objectives.

Disclaimer:
*Any opinions, views, analysis, or other information provided in this article is provided by BROKSTOCK SA trading as BROKSTOCK as general market commentary and should not be viewed as advice according to the FAIS Act of 2002. BROKSTOCK SA does not warrant the correctness, accuracy, timeliness, reliability, or completeness of any information provided by third parties. You must rely upon your judgement in all aspects of your investment decisions, and all decisions are made at your own risk. BROKSTOCK SA and any of its employees shall not be responsible for and will not accept any liability for any direct or indirect loss, including, without limitation, any loss of profit which may arise directly or indirectly from the use of the market commentary. The content contained within the article is subject to change at any time without notice. BROKSTOCK SA is an authorised financial services provider - FSP No. 51404. T&Cs and Disclaimers are applicable: https://brokstock.co.za/
** This article was prepared by BROKSTOCK analyst Maboko Seabi