I love dividends.
To me, receiving a regular dividend payment concretizes the rewards of stock investing.
I like to think of them as wages. Instead of paying me to drive a truck, man an assembly line, or sit behind a desk, however, the company pays me to provide it with capital.
To be sure, there’s not much labor required to perform this “job.” I simply need to ask my broker to buy some shares.
But just as I have a limited amount of time to offer an employer each week or month, I also have a limited supply of capital.
So, I want to receive the best wage I possibly can in return for investing it.
The Johannesburg Stock Exchange is home to a number of excellent dividend stocks, but before I share some of my favorites, let’s look at some of the elements that separate good dividend payers from dodgy ones.
Stocks That Pay Generously
Investing in a stock without dividends is like taking a job at a small technology start-up. They don’t pay much at first. Instead, they promise rapid growth and big dividends in the future. Investing in them is risky if you’ve got bills to pay and a family to support.
Stocks with high dividend yields are often a more prudent choice. A share’s dividend yield shows us how much of a “wage” it pays in relation to its price. To calculate it, we simply divide the total dividend per share that the company paid over the most recent 12 months by the current share price.
dividend yield = dividend per share / share price
Stocks with dividend yields above 5% are generally considered to be high dividend-payers. So I’ll screen the shares listed on the Johannesburg Stock Exchange for companies that meet this criteria.
There are currently 71 JSE stocks with dividend yields greater than 5%.
Could I “take a job” with any one of them? Yes, but without further research, doing so may lead to anxious, sleepless nights.
Why? Because some companies are more generous with their dividend payments than they can afford to be.
Beware High Debt Loads
I once worked for a company that paid quite well.
Unfortunately, the company also carried a very heavy debt load.
When the economy turned sour, it could no longer afford to service its debt, let alone pay wages to employees like me. So, it soon went bankrupt.
Similarly, companies with high levels of debt may be forced to cut their dividend if market conditions deteriorate. It wouldn’t be wise to depend on them for steady income.
So, let’s look at our list of 71 companies and remove any with debt levels higher than 70% of their book value. We calculate this debt to equity ratio by dividing all of the company’s interest-bearing debt by its total equity.
Companies like PPC, which took a big loan a couple years back, and most real estate companies have debt/equity ratios higher than 0.7 and are removed from further consideration.
That leaves us with a group of companies that have some resilience to weather tough times without immediately cutting dividend payments to shareholders.
We’re making some progress.
Don’t Forget Growth
Now, let’s add a growth component to the selection process.
Just as we’d like to work for a company that regularly raises the wages of its loyal employees, we want to invest in companies that appear capable of growing the amount of cash they pay to shareholders.
To help us make this judgment call, we’ll remove companies with payout ratios greater than 70%.
The payout ratio measures how much of each rand a company earns that it pays in the form of dividends. It’s calculated as follows:
payout ratio = dividends per share / earnings per share
The higher the ratio is, the less cash the company is retaining for the purpose of growth. A company with a 90% payout ratio, probably doesn’t intend to grow very much. A company with a 10% payout ratio, however, most likely intends to grow quite quickly.
Safety in Size
Let’s further winnow the results by removing very small companies, those with a market capitalization less than ZAR750 million (roughly $50 million).
Such companies face the risk of being crowded out of the marketplace by larger competitors. Thus, a steady dividend from them is less than a sure thing.
This removes some interesting micro-caps like Verimark and KayDav Group from the list of contenders.
Consistency is Crucial
Finally, let’s take a look at the dividend payment history of each company that remains on the list.
We want to eliminate companies that slashed their dividend at any time during that time period. Why? Because if they reduced their dividend one time, they may very well decide to do so again.
The Rock Solid Dividend-Payer Screen
To recap, we screened the market for shares that met the following standards:
1. Dividend yield > 5%
2. Interest-bearing Debt to Equity Ratio < 0.7
3. Payout Ratio < 0.7
4. Market cap > ZAR750 million
5. No dividend cuts in past five years
7 Solid South African Dividend Stocks
When the dust settles, we’re left with a group of seven companies from a range of industries – all of them look steady as a paycheck.
(Note the table below was updated on 24 June 2016.)
|Yield||LT Debt/Equity||Payout Ratio||Market Cap|
|Combined Motor Holdings||7.7%||9.3%||45.1%||R1,271m|
|Standard Bank Group
Disclosure: I hold a beneficial interest in shares of Nedbank, Liberty, and Standard Bank.
What Do You Think?
What are the essential ingredients of a good income stock? Do you have a favorite that you’re willing to share? Let’s hear your thoughts in the comments.
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52 thoughts on “7 Rock Solid South African Stocks That Pay Big Dividends”
Do you have stocks that export to Subsaharan countries?
Here’s an article I wrote for AFKInsider that lists eight South African companies with big Sub-Saharan operations:
Your table is not displaying so I cannot see your final list. Same with your other web pages. Please fix, I would like to see your final list of companies.
Sorry about that, Chris. The table has been fixed.
Just wanted to say that you write excellent, high quality articles. They are simple and easy to understand, straight to the point, informative and extremely useful. Rare to see someone giving out such information.
Keep up the good work that you are doing!
I would one day want to see an article where you have fully analysed one company/market with all the possible ratios one is taught in financial analysis.. Something a bit more technical than the standard ratios and then tracking that through your blog and comparing if it really did well compared to the ones you thought wouldn’t fare so well. For example, how the above 7 stocks fare a year from now compared to their counterparts.
Thank you for sharing your knowledge.
Thanks so much, Investor. And that’s a great idea. I’ll look back over the old articles to see if any could use an update.
Hi Ryan. I just started my investment portfolio. Do you have an email
I have got investments in preferance shares. I invested in these with the aim to enjoy a secure high income yield. The quoted price of these shares has dropped substantially since buying these shares. I am under the impression that some funds looking for high dividend yielding investments might be interested in these type of shares.
Please let me know what you think or suggest.
I think you’re thinking about it correctly. Assuming that you’ve invested in strong businesses, the dividend should be safe, similar to a bond, and the lower the price goes, the more attractive they become to income investors.
Great article Ryan – thanks for sharing.
To those readers based in the US, it might be helpful to know that you can trade South African stocks through a Fidelity account. If you trade online, commissions are 225 ZAR per trade, plus the SA securities transfer tax. Saves you from having to open an account in SA.
That’s a great tip, Chris. I didn’t know Fidelity offered this. Thanks!
It is important to have dividend policy for company and available for public.
Nice one, Roman. Many companies have a policy of distributing a certain percentage of earnings to shareholders. When this is publicized, it takes some of the guesswork out of forecasting dividend income.
Right on point,this article is excellent and shows that the investor can be paid while waiting for growth, the combination of dividend/growth is what makes all of us stay up at the night looking for opportunities,and one for the fact that u can find it in Africa, it’s even better. Thanks Ryan
Hi Ryan. I would agree that ” Consistency is Crucial”. The Dividend Aristocrats indices from S&P Dow Jones Indices are indices that look for stocks that can consistantly increase their dividends over a period of time. This is somewhat a reflextion on good managment as well. The S&P South Africa Dividend Aristocats Index only include stocks that has increase their dividends over 5 consecutive years. Over the last 5 years the index has outperformed the ALSI by around 2% pa and at much lower risk. Foschini, Truworths and Lewis can also be found in the index. Grindrod Bank offer an ETF (DIVTRX) that tracks this index on the JSE, while State Street offer ETFs based on the S&P Global Dividend Aristocrats Indices.
An eye opener especially impressed on how well retail business is doing as they are in the top three.
what do you think of first rand, vodacom, mtn, standard bank as dividend stocks
vodacom, mtn, standard bank definitely proved that they can pay regular and increasing dividends each year.
I am new to this business of investing on the stock market. Who are the 7 companies that you are writing about or did I miss it somehow.
Sorry, Kevin. I recently moved the website to a new publishing platform and lost all of my data tables in the process.
I’m in process of updating this article with a fresh batch of South African dividend stocks. Look for it to be posted within the next two weeks.
Many thanks for the feedback and let me know if you have other questions as you begin investing!
Looking forward to post of the 7 top
Nice article. I’ve just started investing and your article above is very good; clear and concise.
Thanks, Neal! I appreciate the feedback. All the best to you as you build your portfolio.
I cannot see the table. Can you email it to me please?
Hi I have 100 000 that I would like to invest yet I know nothing about stocks what would you advise
I live in the UK but have some money in South Africa that I would like to buy shares with, but once bought would it be possible for me to have them transferred to the London STock exchange. Is this possible, and if so, how would I go about doing it.
Love your article Ryan as a youth mid twenties please advise me where to start, I would really appreciate your email. Thanks Ryan.
Thanks, Sisanda. Great to hear that you’re interested in beginning to invest. Here’s an article that will help to make sure you’re in a secure financial position before investing in shares.
Have a look and let me know if you have questions. You can reach me in the comments or at firstname.lastname@example.org.
Take care and all the best!
I have small problem understanding the above results. As a first year BCom student we have not received any information that might help with the understanding of such information. If possible may you please enlighten me further,.
Dividends are one of the two main ways to earn money from investing in shares. Here are a couple articles that can help introduce you to the topic.
If you have questions after reading them, let me know in the comments. All the best!
So you’ve narrowed the list down which is great. Where to from here?
Can I invest in these shares via Satrix or through my bank, ABSA? Or would I have to go directly through a broker? And if I do go the Satrix/ABSA route, will I still be eligible for the dividend payout?
While some of these shares may be represented in certain Satrix funds, the only way to get targeted exposure to them is by going through a stockbroker.
If you prefer not to open a brokerage account, you may want to consider the Satrix Dividend Plus Fund, which pays out a quarterly distribution based on the dividends that it collects during the period. More info here: http://www.satrix.co.za/fund-research-product.php?type=UT&fund=satrixDividendPlus
Interesting list. I’m definitely looking into emerging markets like Africa. But for now I’m sticking to great global dividend stocks…
African companies don’t have the same strict report requirements. That’s why I’m just looking for international exposure through global U.S. companies.
Thanks, Brian. It’s a bit of a misconception that African companies don’t have strict reporting requirements. All major African markets require listed companies to abide by IFRS and most companies are audited by the same global accounting firms that most US companies are.
Great article, very informative.
Is there a comparison of 2015 vs 2016.
Do you have an update list for 2016.
You are obviously not interested in the ethics of the companies you have in your top dividend payers. Take the example of Lewis. We have had a three year struggle on behalf of a pensioner on the farm we live on. He was sold furniture with a repayment of R797 per month. However he only gets a Government grant, which at the time was R2200 per month. On complaining to the NCR, nothing was done and I was told Lewis had added the grant of his common law wife to his income. They were not interested that her grant was a temporary one that had to be renewed every six months.
This is helpful to know, Kevin. Thank you. Actually, I am quite interested in the ethics of the companies that appear here. So, don’t hesitate to comment if you see others that you believe are bad corporate citizens.
Why did you remove Truworths from your list?
I’m a newbie in this and I’m very interested in the rationale behind adding and removing shares from your list.
Good catch, Isaac. At the time I updated the list, the stock’s yield was a hair less than 5.0%. The share price has since fallen and bumped up the yield, meaning that Truworths now passes our dividend test, too.
Where can I find a list of all the dividend paying stocks trading in Africa? I too, LOVE dividends!
You can find good African dividend stocks using FT.com’s global equity screener – http://markets.ft.com/data/equities?expandedScreener=true. Screen for African stocks and then sort by dividend yield.
Do these stocks pay out annualy or monthly?
Most of these stocks pay annually and the remainder pay every six months.
I enjoyed reading this. Very concrete defined strategies outlined and not just the same recycled content that you find on other websites. Good job.
What are your thoughts on investing in companies like Checkers, Woolworths and the popular Platinum and Gold mining companies that are involved in SA?
Or am I talking complete garbage LOL
Thanks, Navish, and your comment is not complete garbage at all. Checkers is a division of Shoprite Holdings. Shoprite and Woolworths may not be particularly appealing as dividend stocks due to their relatively low yield, but they are both fine companies and I have a beneficial interest in both of them.
I’m not, however, particularly keen on mining stocks due to their volatile nature, difficulty to analyze, and the social and environmental impact of their operations.
Hope this helps and happy investing!
hi you used to have lewis group on this list any specific reason for removing it
Yes, Lewis used to be a fixture on this list, but its headline earnings slipped 26.5% last year. So, while management held the dividend steady at R5.17, it’s payout ratio rose to 83% (above the 70% threshold). If earnings continue to weaken, it may be impossible for the company to avoid cutting the dividend.
Thank you so much for the much needed info as I’m am new to the investing world.
I would like to invest but dont know how, please help!
Have a look at this article and then let me know in the comments if you have any questions:
hi ryn…i just wanna ask you this.when you buy shares what percrntages are they offering when they pay dividents……meaning how musch percentage per share?……do you choose yourself how many percentages you want or they choose for ou……….are there any shares that pay dividents monthly ?
Good questions. The dividend yield (percentage) is determined by the current price of the stock. It is simply the total dividend declared by the company during the past 12 months divided by its current share price.
For example, suppose a stock was trading at a price per share of R20.00 and the company’s total dividend payout over the previous year was R1.00. In such a case, the stock’s dividend yield would be 5.00%, because R1.00 / R20.00 = 0.05 or 5%.
But if the stock’s price rose to R25.00, the dividend yield would fall to 4.00% because R1.00 / R25.00 = 0.04 or 4%.
Most JSE-listed companies pay a dividend on either a yearly or half-yearly basis. I’m not aware of any that pay monthly.