How to earn passive income through dividends on your investments

If you invest your money wisely, you will be able to watch it grow beyond inflation. This is a far better option than simply leaving your money in a general savings account.

However, did you know that you could also receive interest or dividend payments on your investments? We have a look at how this works and how this can contribute to your passive income.

Tip: Join CreditSav to see which investment opportunities are available for you.

How do dividends work?

According to Brad Price, founder of KarbonPay, a dividend is when a company distributes a portion of its earnings to some of its shareholders.

He explains that dividends can be issued in various ways, but most commonly they are issued in the form of cash pay-outs.

“Dividends are based on how many shares you own in a company. This is also called Dividends Per Share (DPS). As an example, if a company announces a R10 share dividend and you own 100 shares, your dividend cash pay-out will be R1,000,” says Price.

Can dividends be used as passive income?

There are various ventures you can pursue that will earn you passive income, and dividends should be on this list. You place your investment and you earn an income even though you do nothing further.

“Dividend stocks are one of the simplest ways to generate a passive income. Investors have the choice to pocket the cash, or to reinvest the money in additional shares,” says Price.  

He explains that it's important for investors to remember that dividend yields can vary greatly between companies, and they can also change from year to year.

You could earn dividends through crowdfunding

Price points out that the easiest way to earn dividends is through publicly-traded stock, accessible on stock markets such as the JSE or NYSE. However, he believes that equity-based crowdfunding is also creating new and easier ways for investors to get a piece of the action.

“Without needing to set up complex trading accounts or understand the intricacies of trading in the public markets, new investors can invest smaller amounts in private companies that are raising capital through crowdfunding initiatives,” says Price.

“While these kinds of investments pose a higher risk, they also create opportunity for higher returns, both through dividends but also through share value,” he adds.

However, if you’re more comfortable sticking to traditional investment options, you can gain access to the stock market through a broker, or try your hand at picking your own stocks with apps like EasyEquities.