When people invest, they receive three major forms of returns - cash dividends, scrip issue and capital appreciation. But as a result of the global financial meltdown that impacted negatively on the Nigerian equities market, investors have not reaped so much in terms of capital gains.
While the stream of capital gains has not been flowing as expected, last few months have seen investors receive dividends. Also, some companies have delighted investors with bonus issue.
In the months of June and July this year, the equities of 19 companies were of adjusted for dividends, meaning that they have rewarded investors with dividends. Some of the companies recently announced their financial results and would soon pay dividends once the shareholders approve the results at their annual general meeting (AGM).
PZ Cussons Nigeria Plc declared a profit of N5.6 billion for the year ended May 31, 2010 and a dividend of N0.86 per share. The dividend is expected to be approved on September 9, and paid on September 14.
Flour Mills of Nigeria Plc declared a profit after tax of N16.9 billion for the year ended March 31, 2010. The directors recommended a dividend of N2 per share and a bonus of one new share for every 10 shares already held. The approval will be on October 20, 2010, while payment will be made on November 3, 2010.
In a similar vein, Nigerian Bag Manufacturing Company (BAGCO) announced a profit after tax of N353.33 million for the year ended March 31, 2010 and a dividend of N0.13. The dividend is expected to be approved on October 9, 2010, while payment date has been fixed for November 3, 2010.
Recently, investors in oil companies such as Total Nigeria Plc, Oando Plc, Mobil Oil Nigeria Plc and MRS Oil Nigeria Plc have declared mouthwatering dividends.
Also, leading manufacturing firm such as Nestle Nigeria Plc, Unilever Nigeria Plc, UAC of Nigeria Plc have put smiles on the faces of their investors through dividends.
More companies are expected to announce dividend as they continue to record improved profitability. Market operators believe that while there may currently be high volatility in the market that may affect level of capital appreciation, investing in dividend-paying companies is a good strategy to survive the turbulent time and move on.
Dividend is the benefit that a company gives to its shareholders when it earns profits. Companies share a portion of their profit with the shareholders as dividends at the end of their financial years. Some even give dividends twice in a year.
According to experts, investing for dividend is a strategy with numerous advantages. The most obvious is that a portfolio full of high yield companies will be paying you money every year. These are monies that you can either re invest in more shares, or use to cover unforeseen expenses. This implies that whether prices are going down or not, you are sure of getting returns at the end of the financial year of the company you have invested in.
According to operators, when you invest more money in bearish period, you are incurring more cost and losses.
However, it is the belief of financial experts that one the many benefits of buying stocks that pay dividend regularly is cost reduction.
The Managing Director of Cordros Capital Limited, Mr. Wale Agbeyangi, said that when you invest in dividend-paying firms, with each dividend you receive, your cost basis is essentially being reduced.
“Otherwise put, with each dividend received, your risk of permanent capital loss is slowly being reduced. Investments experts said that if you hold a dividend-paying stock for enough years, your dividend may eventually cover a significant portion of your cost basis. This is especially true for companies that either pay a large dividend or that regularly increase their dividends over time,” he said.
He added that when you invest in companies that pay dividend regularly, it reduces the price you originally paid for the shares. This, he said, could be likened to buying a house, then renting it out to offset the payment and pick up income, while the underlying asset appreciates at the same time
Another big plus for investing in the dividend paying stock is that it gives you regular return without having to add more money. That means dividend stocks can be a regular source of income for the investors.
“So, if you are looking for a long-term investment that will give you income at regular intervals, dividend stocks are the best viable stock investment option for you,” he said.
Mostly, dividends are paid by companies that are in the business for longer period of time and have a strong financial standing. These companies post profit at regular basis and show steady growth over a period. That means companies that have dividend stocks are reputed and financially sound companies that have a bright future as well. So by investing in these companies or the dividend stocks the investors can effectively reduce the level of risk.
Buying such stocks now despite the volatility is, therefore, not a big risk since you are sure of getting a dividend at the end of the year. And given the current prices of the stocks, any dividend received now will come with a good yield.
Dividend stocks will help you accumulate far more money than any other stock investment, possibly more than any type of investment, period. They offer the best total return. Remember, total return is the real target, not merely price appreciation.
Ordinarily, re-investing the dividends is one the key strategies to long-term growth of your investments. It brings the miracle of compounding into play. By re-investing dividends, you are creating a virtuous circle. It translates into more shares for an investor, which means more dividends that could equally lead to more re-investment.
However, given the current nature of the market, many people will not want to re-invest their dividends. Instead, they will use for their upkeep for the time being.
Another good reason for going for dividend companies is that while price goes down in a bear market, most of the companies hardly cut their dividends. Instead, they raise their dividends in line with their unwritten company policy. In most cases, some of those companies go to great lengths not to deviate from the dividend pattern they have established. They know that their shareholders expect it, hence they will not want to disappoint investors.
According to experts, there is no better time to adopt the strategy of buying dividend-paying stocks than now. In the first place, most of the stocks are trading below their two years low. This implies that buying them gives you an opportunity to earn good dividend yield.
Besides, while you are buying the stocks at prices you would have paid two years ago, the dividend you will receive will be higher than the one paid two years ago.