Is Stocks a Good Source of Passive Income in South Africa? (2024)

Stocks have long been seen as one of the best ways to generate passive income. The idea is simple – you invest in shares of profitable companies, and receive regular dividend payments as those companies distribute their profits to shareholders.

But does this model hold true in the South African market? In this post, we’ll take an in-depth look at whether stocks are a viable passive income stream for South African investors.

WHAT YOU'LL LEARN

How Dividends Work

Before determining if stocks can provide reliable passive income in South Africa, it’s important to understand exactly how dividends work.

Dividends are cash payments made by a company to its shareholders, usually on a quarterly basis. They represent a distribution of corporate profits – a portion of the company’s earnings paid directly to investors. The amount paid per share varies by company, but is usually expressed as a percentage of the share price or a fixed rand amount.

For example, if a company has 100 million shares outstanding, and declares a dividend of R1 per share, it will pay out R100 million to its collective shareholders. As an individual investor, the amount of dividends you receive depends on how many shares you own. Owning 1000 shares would net you R1000 in this example.

Dividends provide a steady stream of passive income, provided the underlying companies continue to remain profitable. The key advantages are:

Regular payments – Dividends are usually paid consistently, on a scheduled basis. This provides predictable income for investors.
Upside potential – As a company grows, it can choose to increase its dividend over time, allowing your passive income to rise.
Tax efficiency – Dividends in South Africa currently face favourable tax treatment compared to other investment income.

This makes a portfolio of dividend stocks an appealing option for passive income seekers. But generating consistent dividends relies heavily on choosing the right stocks…

Evaluating the South African Market

South Africa has several high quality companies that pay out handsome dividends. But there are also unique challenges that investors need to consider:

Limited universe – South Africa has far fewer stocks compared to developed markets, making it harder to diversify across sectors and companies. The JSE has just over 300 listed stocks, compared to 5000+ on US exchanges.
Concentration risk – A large proportion of South African companies’ profits are tied to commodities. This lack of diversification introduces risk, as commodity price swings affect dividends.
Corporate volatility – South Africa’s uneven growth trajectory, prone to booms and busts, makes earnings less predictable. The dividend payouts of domestic companies tend to fluctuate more as a result.
Higher yields – On the plus side, South African dividend yields tend to be higher than global counterparts, averaging 4-6% vs 2-3% in the US. This cushions investors from some of the risks.

So South Africa presents a double-edged sword of higher yields but also greater unpredictability. Let’s explore specific stocks that balance these dynamics well.

Best Dividend Stocks for Passive Income

Here are the top shares to consider for a dividend portfolio in South Africa currently:

1. Naspers

Tech and media conglomerate with R57 billion in annual profits
Pays a consistent annual dividend of around R3-4 per share
Offers a dividend yield of 4-5% at current prices
Dividends supported by earnings from global tech investments

Naspers has some volatility, but its high yield and diversified global assets make it a solid dividend payer for local portfolios. Holding Naspers provides a lower risk way to gain exposure to global tech giants like Tencent.

2. MTN

Africa’s largest mobile network with 243 million subscribers
Recently resumed paying dividends after a few lean years
Last dividend was R4.74 per share, translating to a yield above 8%
Cash flows are solid and expected to support higher dividends over time

MTN provides essential telecom services across Africa, giving it stability combined with a high starting yield. Its payouts are likely to grow steadily as profits recover.

3. British American Tobacco

Major global tobacco company with brands like Dunhill and Lucky Strike
Pays some of the most consistent dividends on the JSE for years
Last year’s payout was ~R74 per share, yielding over 8%
Recession-proof business allows stable earnings and dividends

Legal and health concerns have impacted tobacco companies, but profits remain robust. British American’s high yield and steady payouts make it a favourite for dividend investors.

4. Reinet

Investing vehicle headed by billionaire Johann Rupert
Holds stakes in luxury brands, mines, and financial companies globally
Paid a dividend of R9 per share last year, translating to a 7% yield
Dividends supported by investments in unlisted assets

Reinet owns a unique portfolio of assets worldwide, providing diversification. Its high but volatile dividend stream comes from realized gains on its holdings.

5. Clicks

Dominant health and beauty retailer with over 800 stores in South Africa
Recently hiked dividend by 17% to R4.48 per share
Offered a trailing yield of 4.7%, with potential for more growth
Mature cash generative business with strong market position

Clicks Group has rewarded shareholders with a climbing dividend for 10 straight years. Its defensive nature makes further increases likely.

Key Factors to Assess Sustainable Dividends

Not all high dividend yields are created equal. When evaluating stocks primarily for their passive income potential, be sure to assess:

Payout Ratio – How much of a company’s earnings are paid as dividends. Ratios below 60% are ideal for payout sustainability.
Cash Flow Coverage – Dividends should be sufficiently covered by operating cash flow, with a ratio over 1.5x.
Debt Levels – Firms with high debts relative to equity carry more risk. Avoid overleveraged companies.
Business Stability – Look for companies with steady earnings throughout economic cycles and downturns.
Dividend Growth Streak – The longer a firm has maintained a stable or rising dividend, the better.
Foreign Exposure – For South African stocks, global diversification provides crucial protection from domestic uncertainty.

How Much Passive Income Can You Generate?

Assuming an average dividend yield of 5%, here is how much annual passive income you could expect on different investment amounts:

R100,000 investment -> R5000 per year
R500,000 investment -> R25,000 per year
R1 million investment -> R50,000 per year

So with a diversified portfolio of solid dividend stocks, passive income equivalent to a part-time job is certainly achievable. Reinvesting dividends can allow your income stream to grow substantially over time.

The key is holding a basket of at least 15-20 stocks across multiple sectors, to mitigate South Africa’s concentration risks. Individual stocks with yields approaching 10% may seem appealing, but require careful evaluation for sustainability.

Is Passive Income from Stocks Reliable in South Africa?

Given South Africa’s economic challenges, relying purely on local stocks for passive income does carry risks. But by focusing on shares with wide moats, low payout ratios, and geographic diversification, dividends can provide a stable foundation for income.

Supplemented with some global dividend stocks, a selective portfolio can produce consistent passive income that tracks or exceeds inflation. Maintaining a long-term outlook and reinvesting dividends helps grow this over time.

While not risk-free, dividends represent one of the best sources of predictable investment cash flow for South Africans seeking financial security. With prudent stock picking, they can form the bedrock for a diversified passive income strategy.

Are Dividend Stocks a Reliable Source of Passive Income in South Africa?

Is Stocks a Good Source of Passive Income in South Africa?

How Dividends Work

Evaluating the South African Market