As a shareholder, when you own a stock that pays dividend, you have two alternatives, either to take the cash or reinvest it to buy additional shares of that stock.
Having the cash on hand is not a bad idea. However, reinvesting it serves you better in the long-run.
Public-listed companies reward owners with dividends for their investment. Dividend is the distribution of reward from a portion of a company’s earnings to shareholders, and is one way investors earn a return from investing in stock.
Reinvesting your dividends mean you are buying additional shares of the company’s stock with your cash dividend, a strategy helps grow your investment income overtime.
By purchasing new shares of a stock with cash dividends, you can grow your investment at a much quicker rate than if you pocket your dividend and depend wholly on capital gain to generate wealth.
While investing in dividend-bearing securities is a good way to earn steady returns, reinvesting it pays-off than taking the cash, particularly for long-term investors
The following stocks show how your investment appreciates by reinvesting in stocks with sound dividend track record.
Zenith Bank
| Pay-date | Final Dividend (N) | Share price (N) |
| 06/04/16 | 1.55 | 11 |
| 23/03/17 | 1.77 | 13.80 |
| 13/04/18 | 2.45 | 26.10 |
| 18/05/19 | 2.50 | 21.90 |
Source: NSE
Nigeria’s top lender by assets has been consistent in delivering dividends to shareholders. The tier-1 bank paid N1.77 per share on March 23 2017, and traded last at N13.80 the same day.
Thus, an investor with 500, 000 units is entitled to a cash dividend worth N885, 000. Reinvesting this sum, gives him an additional 64, 130 units, bringing his total holdings to 564, 130 units.
With 564, 130 units, he is entitled to N1, 382, 118.5 cash dividend given that the lender paid N2.45 on each shares on April 13, 2018.
Reinvesting this would elevate his stake by 52, 955 units to 617, 085 units as the stock traded last at N26.10 that day.
The shareholders of Zenith Bank approved N2.50 dividend at the bank’s 2018 Annual General Meeting (AGM) held March 18, 2019.
This implies that if our hypothetical investor, with 617, 085 units of Zenith’s shares will be paid N1, 542, 712.50, and using this sum to purchase additional shares elevate his holdings by 70, 443 units to 687, 528 units as the shares traded last at N21.90 that day.
Within three years, his holdings surged 38.5 percent to 687, 528 units from 500, 000 units.
Dangote Cement
| Pay-date | Final Dividend (N) | Share price (N) |
| 21/04/16 | 8.00 | 161 |
| 26/05/17 | 8.50 | 166.80 |
| 21/06/18 | 10.50 | 230.30 |
Source: NSE
Nigeria’s most-capitalized firm, Dangote Cement, has been consistent in delivering returns to shareholders.
Interestingly, dividend declared by the cement maker has trended upwards for four straight years to 2018.
With 500, 000 units in Dangote Cement, you are entitled to N4 million cash dividend as the company paid N8 on each unit held on April 21, 2016, and reinvesting this sum increases his holdings by N24, 845 units given that the company traded last at N161 at day.
The cement maker paid N8.5 on each share on May 26, 2017, and this investor with N524, 845 units will get cash dividends worth N4, 461,183 and using this money to buy additional shares will elevate his stake by 26, 745 units to 551, 590 units as the stock traded N166.80 that day.
Holding 551, 590 units entitle this investor to N5, 791, 695 cash dividends, reinvesting this sum get him 25, 149 more units, to bring his total holdings to N576, 739 units.
Now imagine what his investment will look like when the cement maker will pay N16.50 on each share at its 2018’s AGM coming up June 17, 2019.
It is noteworthy that this strategy works in a company’s stock that delivers dividends consistently to shareholders.
This underscores the importance of assessing the profit-generating capacity of a company before reinvesting dividends as a company with losses cannot pay dividend.
However, these stocks are only used to explain the benefits related to reinvesting dividend, and not by any means a form of recommendation.
