Understanding dividends and re -distributions when it comes to investing.

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“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in” J D Rockefeller.

What is a dividend?

Dividends are a very exciting topic because dividends are a source of income an investor earns from simply being a shareholder in the company. By the mere fact of owning shares in a profitable company you can earn a slice of the profits without the need of having to go to work or run a business.

A dividend is a payment that is regularly made to shareholders, this payment is a distributed portion of the profits made by the company. Therefore, in order for a dividend to be paid out the company needs to be profitable. However with that said a company is not obliged to pay out dividends when they are profitable. It is a choice which is made by the board of directors of that company. With that being said paying out dividends is good business practice ,and shows good faith to the investors and shareholders in the company. 

What is the dividend yield ?

The dividend payment which can be excepted by investors is often represented in the form of the dividend yield. The dividend yield is a ratio expressed in the form of a percentage to show the comparison between the dividend payment against the value of the share. So for example where a share in company X has the value of R50 and the company pays a dividend of R1.25, the dividend yield is 2.5% .The dividend yield becomes a very important metric when comparing which company pays a better dividend. So for example if company Y shares have the value of R1000 each and pay a dividend of R1.50 per shares. The dividend yield for company Y would be 0.15% . Therefore, even though the value amount of the dividend for company Y is higher than that of company X , company X has a higher yield and therefore producers a higher return for the money that you invest, in terms of the dividend payment.

When investing the dividend payment is one consideration, and the dividend yield cannot be analysed in isolation you need to also look at how often it is distributed. 

The impact of dividend redistributions

Dividends are paid out regularly by companies on the condition that they are able to pay out the dividends, by being a profitable company. These payments occur either quarterly , bi-annually or annually. The frequency at which you earn these payments can help you optimise your investment returns. For example if you own 500 shares in company X and each share for the purpose of this example is able to produce a R2.00 dividend payment each quarter for the next 10 years you can accumulate an additional R40 000 from your investments just from dividend payments. If we use the same example but change the distribution period to semi-annually , you will be able to earn an additional R20 000 from the dividend payments alone. If you wisely allow your dividends to be reinvested into your investment portfolio you can even further grow you dividend payments through compound interest.

This is a very exciting prospect, as I mentioned dividends are a great deal and often feel like free money, because it is additional money you earn from shares which hopefully is an extra income from the appreciation in the value of the shares. Often dividend yields increase as the company improves over time, and will not be like the example above because dividend yields are not a fixed amount. It is very important to take note of the fact that dividends are not a fixed amount and are also not a guaranteed payment, as it depends on whether or not the company has been profitable.

Do not count your eggs before they hatch.

Dividends are the icing on the cake, but one must be reserved in their dividend expectations . A dividend is not a fixed amount , and the dividend yield is subject to the market conditions and volatility. Therefore, it is very hard to predict what your exact dividend payment will be prior to when the payment is made. The dividend yield of company X may be 2.35% , but in 2018 due to market conditions the share price on the date of dividend payment is R130 and therefore shareholders in company X will get a dividend payment of R2.99 per share. However, in 2019 the market conditions are less favourable and on the date of dividend payment the price of the share has dropped to R100 and now the dividend payment is R2.35 per share. You can make reasonable expectations around the date of your dividend payments ,but the best thing is to account for them once they have been received.

With this said, it is always a smarter strategy to invest in securities that pay some form of dividend . If you invest in a company directly or indirectly through a collective investment scheme like an ETF that pays no dividend, it is perhaps best to consider broadening your investment vehicle to include some dividend paying investments. As a shareholder in a company or collective scheme you need to remember that you carry the most risks in the company, as you have no secured rights over the assets of the company like bondholders or other investors in the company. Therefore, if the company is to go bankrupt you have the last claim to any assets of the company and therefore as some compensation for the risk you absorb you should be respected with a dividend payment.

If you are looking for exposure into companies that produce a consistent and high dividend yield you should consider the following investments: 

  1. Satrix Divi ETF
  2. Statrix Dividend Plus Index Fund
  3. CoreShars S&P Global Dividen Aristocrat 
  4. CoreShares SA DIVI Aristocrats 

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