How to stretch your dividends

LUMP SUM: SOME SMART MOVES CAN MAKE IT LAST LONGER

Mikayla Collins, a wealth manager with NFB Private Wealth Management in Cape Town, advises a reader on making dividend payments last.

Question: Last year, I got a 13th cheque from dividends, and I expect a similar payout this year. Instead of blowing it again, how can I invest for a monthly income, maybe over two years?

Answer: A lot of people who get a bonus tend to “blow it”. I would, however, suggest you also consider the long-term potential of any extra income, no matter how small.

If you are using a credit card or overdraft as expenses that overwhelm your monthly income, then I support your idea to supplement your income for the next two years.

Two years is a very short time horizon and you will be left with nothing at the end.

If so, you will need access to the money and very little, if any, risk. I would suggest either multi-asset income unit trusts – the top funds produce between 8% and 10% per annum historically – or a bank savings, call or money market account with cash immediately available. These accounts produce between 5.5% and 7.5% per annum. Say the amount is R50 000. If you can achieve returns of 10% for the next two years, this will produce an income of R2 307 per month. At 7% per annum, the monthly amount will be R2 194 per month, so it is probably not worth taking the risk. If you don’t really need the additional income now, you may want to consider investing the amount for a longer term. You could consider a tax-free savings account or retirement annuity (RA) to reduce your taxable income. Consider the long-term potential of any extra income, no matter how small

You could get something more back from the South African Revenue Service next year, depending on what existing retirement contributions.

Let’s use the same R50 000 and assume you are below the maximum deductible contributions to your retirement funding. This is currently 27.5% of your remuneration or taxable income, or R350 000 per annum, whichever is lower.

Let’s also assume you are in a 36% tax bracket. If that is the case, you would get an additional R18 000 back from SARS or have to pay in R18 000 less for income tax when you submit your next return. In other words, you receive your R50 000 dividend, you invest it into an RA which results in you having an extra R18 000 next year, and the R50 000 also grows until you retire. You can only access the money in an RA once you turn 55.

The tax free savings account option wouldn’t allow you to deduct contributions for tax, but it also doesn’t tie the money up until retirement. You can benefit hugely if you think of it as an additional retirement savings plan.

Let’s say that you have 20 years to retirement. If you put R30 000 per year into a tax free savings account and achieved growth of 10% per year, you would have an additional R1.7 million at retirement with no tax consequences at all. R1.1 million of that would represent gains which would otherwise have been taxed.

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