In a recent article by Onome Ohwovoriole published by Nairametrics, it was noted that about N129 billion is sitting idly in an unclaimed dividend account. Regrettably, efforts by the Security and Exchange Commission (SEC) through its implementation of the e-dividend program were not able to reduce the increasing accumulation of unclaimed dividends.
Since that program did not work or has not worked, it may be time to try some other ways or strategy to get the dividends into the “pockets” of their rightful owners. One strategy or method that could come handy is the implementation of dividend reinvestment plan, DRIP.
A dividend reinvestment plan is a system where the dividends received from a company whose shares you hold are automatically reinvested, usually commission free, into additional shares of the same company’s stock.
How DRIP Works
The way the system works is that an investor checks a box, when initially buying the shares of a company and by checking the box, the investor instructs the broker to reinvest whatever dividends that come from a particular share holding by buying more share of the same company, even if it means buying fractional shares, in cases of small dividends. May be an illustration will make this concept clearer.
Let us say that you invested N10,000 into AIICO Plc by buying 10,000 shares when the price was N1 per share and you elect to have your dividends from AIICO to be reinvested under a DRIP. Six months after, AIICO declares a 3k dividend per share.
On dividend payment date, the price of AIICO shares had fallen to N0.85 per share and with 10,000 shares your broker realizes N300 for you and uses that money to buy additional 352.9 shares of AIICO for you.
By so doing, your share holdings of AIICO increased to 10,352.9 and your dividend falls out of the unclaimed dividend pool.
Advantages of DRIP
Not only will Dividend Reinvestment Plan help in solving the problem of unclaimed dividends, it helps reduce investment cost in that the additional shares are usually bought free of commission.
For example, if the investor that realized N300 from AIICO dividend takes that dividend into his or her brokerage account and then later decides to buy additional shares with it through a broker that charges a commission of N30 per trade, such an investor would be left with N270 to invest rather than the N300 that could have been invested via a DRIP, commission free. N30 may not sound like a big amount of money, but for a stock that pays dividend semiannually, this will amount to about N600 over a 10-year period.
Another advantage of DRIP is that it automatically sets in motion the compounding process of wealth accumulation. By reinvesting your dividend, over time you end up being a big investor in any particular stock that you hold. And as your investment increases through DRIP, so does your dividend and as your dividend increases through DRI so does your investment and the multiplier concept continue ad infinitum, as long as you continue to hold the stock and carry on with the DRIP.
Implementation of the Dividend Reinvestment Plan in Nigeria will add vibrancy to the stock market. Think of what will happen if the outstanding N129 billion sitting in unclaimed dividend account is pumped into the stock market through the DRIP. That will increase market capitalization and activity.
The only disadvantage of DRIP is that the investor does not have the choice to decide on investing in another stock different from the one that generated the dividend. Unlike when an investor realizes the dividend in cash into his/her brokerage account and decides which stock to buy with the resulting cash, DRIP forces investors to buy additional shares of the stock that paid the dividend.
DRIP and Company Law in Nigeria
It does not seem that Dividend Reinvestment Plan exists in Nigeria as a matter of law but given the ability of DRIP to curb the menace of unclaimed dividends and other advantages of the plan, it behooves the Security and Exchange Commission in collaboration with the Nigerian Stock Exchange to look into the DRIP program with a view to issuing relevant regulations that would enable both investors, brokerage houses as well as companies listed on the floors of the exchange to implement such a program.
Understandably, this may not be that easy to implement but with the co operative actions from the companies, the regulators and brokerage firms, Nigerian investors and the Nigerian stock market stand to gain if DRIP can be part of Nigeria’s corporate action activities.