Those with a more daring investment profile and ready to enter the world of the Stock Exchange must always be aware of the movements. One of the ways to make money from stocks is to buy the stock at one price and sell it at a higher price. Although this is the main way to get a return on this type of investment, it is not the only one. In the world of riskier investments, you can also receive money with proceeds.
Proceeds are benefits that companies pay to their shareholders. When you buy shares from a company that is listed on the Stock Exchange, you become its partner – therefore, a shareholder. Therefore, you can receive part of the profit of that company.
Watch the video to understand the dynamics of the Stock Exchange before understanding interest on equity:
Dividends are the best-known earnings, but there is also interest on equity. In this text, you will understand:
- What is interest on equity?
- What is the difference between interest on equity and dividends?
- How to receive interest on equity?
- How often is interest on equity paid?
- How much can you earn in interest on equity?
- What to do with this proceeds?
What is interest on equity?
Interest on equity is a type of income, money that drips into your brokerage account without you having to sell the shares. Also known as JCP, they are a way for companies to distribute profit to shareholders.
This profit distribution is mandatory and provided for in article 202 of the Brazilian Corporate Law. The law says that companies listed on the Stock Exchange must define the amount to be distributed to investors, but it must not be less than 25% of adjusted net income – that is, the money left over for the company after paying all taxes. .
But this obligation is in relation to dividends. The law does not mention interest on equity. So although it is common, paying JCP specifically is not mandatory.
Why do companies pay interest on equity?
To have tax advantages. In accounting language, interest on own capital is included as an expense in the balance sheet of companies, thus reducing the final value of their profit.
This is advantageous for companies because the Income Tax they pay is charged on top of that profit. With the payment of JCP, the final amount on which Income Tax will be charged is lower. In practice, the company pays less tax.
“That is, the company pays JCP to obtain a tax benefit. It is also advantageous for the investor, because he receives one more benefit in addition to the dividends”, summarizes Ângela Tosatto, investment analyst at NuInvest.
Because of this tax advantage, companies might tend to pay more interest on equity than dividends. Therefore, the Central Bank created rules to limit the distribution of JCP.
“The company cannot only distribute JCP. It can only distribute 50% of net income for the year, which can be year or quarter, or 50% of retained earnings. The company needs to choose the option that generates the greatest value for the investor.”
Ângela Tosatto
That is why companies distribute two types of earnings, dividends and interest on equity.
What is the difference between interest on equity and dividends?
Both dividends and interest on shareholders’ equity are earnings. The difference is in taxes. The payment of dividends is mandatory by law and is exempt from Income Tax for the investor who receives it.
This is because the company that distributes it is the one who pays the taxes for this benefit. Companies pay 34% of taxes on top of the amount to be passed on in dividends (sum of 25% of Income Tax and 9% of CSLL – Social Contribution on Net Income).
The payment of interest on equity is not mandatory, but generates an accounting advantage for companies. As it comes as an expense, companies stop paying that 34% in taxes. It is the investor who pays income tax: there is a 15% charge on the amount he receives.
But calm down, you don’t have to do anything. This charge is withheld at source. That is, the amount of interest on equity that falls into your brokerage account is already deducted from Income Tax.
In practice, the values of dividends and interest on equity fall into your account ready for you to use. And it is not because the dividend is exempt from IR that it is better than the JPC. After all, there is no way to know how much you will receive from one or the other: it may be that in some period the value of interest on equity is even greater than that of dividends, even with the tax. In the end, it’s more money for the investor.
“What matters to the investor is that he is being remunerated, regardless of whether it is through dividends or JCP”, says Ângela Tosatto.
How to receive interest on equity?
To receive interest on equity, you need to invest in shares on the Stock Exchange. Some companies look to the Exchange as an alternative to raise money to boost their own growth. By doing so, they “go public”, that is, they put a piece of themselves up for sale.
If a company were a cake, shares would be small slices that anyone could buy. In other words, buying a share means owning a part of the company. As a partner, you receive some benefits (such as dividends and interest on equity), but you also have to deal with the company’s tough times.
That’s why this market is considered high risk. A company’s stock price can fall or rise very quickly. And, depending on the industry and how the economy is doing, a company may not always be profitable.
In short: receiving interest on equity is a benefit for investors with a bolder profile – who are willing to take risks when investing.
As with dividends, the payment of interest on equity does not have the same frequency for all companies. This distribution can be monthly, quarterly, semi-annually or annually.
“The frequency of distribution is undefined. In addition, sometimes there is that distribution that is not recurring, it is sporadic, which happens when a company sells a building, for example.”
Ângela Tosatto
To find out when companies pay interest on equity, it is necessary to consult the Investor Relations website of each one.
How much can I earn in interest on equity?
There is no specific amount of interest on equity to be paid. As you have seen, this payment depends on the company’s situation and how much it will profit in a given period.
In addition, the amount that will fall into your brokerage account depends on the amount of shares you have in the company. The more shares, the greater the amount received.
For small investors, analyst Ângela Tosatto recommends waiting for this money to accumulate before doing anything. This is because both the value of dividends and interest on equity can be small depending on how much you have invested. The smaller the amount invested, the smaller that amount will be.
“Don’t spend that money if it’s insufficient to buy more shares. Leave it in the account until you accumulate enough money to buy more. If you are investing in a list of stocks that pay dividends, I advise you to invest in the same companies to be able to accumulate more shares and, thus, receive more and more earnings in the next payment”, says the analyst.
This strategy does not imply reducing the amount that you were already separating from your income to invest. That is, the analyst recommends using the proceeds to further increase the equity invested.
“Don’t reduce the slice you already take from your income to invest just because you used the proceeds. Of course, everyone has their own financial reality, but it is interesting to invest more and more to the point where you receive your monthly cost of living in earnings. Therefore, for those who have the option of saving more money, the more they invest, the better.”
Ângela Tosatto
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