Dividend investing explained

What is a dividend?

A dividend is a share of a company's profit paid out to its shareholders, usually in cash. When a company makes money, it can reinvest that profit back into the business or return some of it to owners as a dividend. Established, profitable companies are the ones most likely to pay them.

So a share can reward you two ways: capital growth (the price rising) and dividends (regular income). Together these make up your total return.

What is dividend yield?

The dividend yield tells you how much income a share pays relative to its price. It's the annual dividend divided by the share price, as a percentage. If a share costs R100 and pays R5 a year, the yield is 5%. Yield lets you compare the income from different shares - but a very high yield can sometimes be a warning that the market expects the dividend to be cut.

Dividends and tax

In South Africa, dividends are generally subject to a dividends withholding tax, usually deducted before the money reaches you. A big advantage of tax-friendly accounts is that dividends earned inside a TFSA are exempt, so you keep more. Tax rules change, so always confirm the current SARS position.

The power of reinvesting

Instead of spending your dividends, you can reinvest them to buy more shares - often automatically through a dividend reinvestment plan (DRIP). This turns dividends into a compounding engine: your shares pay dividends, which buy more shares, which pay more dividends. Over decades, reinvested dividends can make up a large share of total returns.

Growth gets the headlines, but reinvested dividends quietly do a huge amount of the heavy lifting in long-term returns.

Are dividends "free money"?

Not quite. When a company pays a dividend, its share price typically drops by roughly the dividend amount - the cash has left the business. Dividends are a way of returning value, not creating it from nothing. Their real appeal is reliable income and the discipline of profitable, cash-generating companies.

How dividends fit a portfolio

• Income - useful if you want cash flow, for example in retirement.
• Stability - dividend-paying companies are often mature and steadier.
• Total return - reinvested dividends boost long-term growth.
• Diversification - dividends are one factor among many; don't chase yield at the expense of a balanced, diversified portfolio.

Track your income with EZvest

Dividends are easy to overlook until you see them add up. EZvest's portfolio tools help you see your holdings and returns in one place, and FinBot can explain any dividend concept in plain language - as an educational tool, never advice.

Educational content only. This article is general information, not financial or tax advice, and nothing here is a recommendation. Dividends are not guaranteed and can be cut. Tax rules are set by SARS and can change. Always consult a licensed financial professional before making decisions. How we research and review these guides.