Investing in the stock market can be a great way to generate income and grow your wealth over time. One way that investors can earn income from their investments is through dividends. In this article, we’ll explore what dividends are, how local dividends are taxed in New Zealand, and what investors should keep in mind when investing in dividend-paying stocks.
What are dividends?
Dividends are payments that companies make to their shareholders. When a company earns a profit, it can choose to reinvest that profit back into the business or distribute it to shareholders as a dividend. Dividends are typically paid out on a regular basis, such as quarterly or annually, and are often seen as a way for companies to share their success with their investors.
Dividends when paid are subject to dividend withholding tax. This tax is deducted from the dividend payment by the company and paid to the government on behalf of the investor. The DWT rate is currently set at 33%, but it may be reduced if New Zealand has a tax treaty with the investor’s home country. This means your dividend income is effectively immediately reduced by about 1/3 every time it is paid out.
Are they a regular source of passive income?
In short, no – dividends are not necessarily a regular source of passive investment income. First, not all companies pay dividends, so it’s important to do your research and choose stocks that have a history of paying dividends consistently.
Second, investors should consider the dividend yield, which is the annual dividend payment divided by the stock price. A higher dividend yield may be attractive, but it’s important to also consider the company’s financial health and the sustainability of the dividend payment over time.
Finally, investors should be aware that dividends are not guaranteed. Companies may choose to reduce or suspend their dividend payments if they experience financial difficulties or if they decide to reinvest profits back into the business.
What happens when I sell my shares?
In New Zealand, capital gains tax is not currently imposed on shares. This means that if an investor sells shares for a profit, they are not required to pay tax on the capital gains. However, if the shares were purchased with the intention of making a profit, they may be subject to income tax. Additionally, if the investor is considered to be trading shares as part of a business, they may be subject to different tax rules. It’s important for investors to understand the tax implications of their investments and to consult with a tax professional if they have any questions or concerns.
Dividends from foreign shares or investments have vastly different tax treatment and implications. We will write a separate article covering this shortly!