One stumbling to wealth accumulation by local retail investors is in the way they use their dividends.
While some companies and cooperative societies pay healthy dividends each year (or even each quarter), many investors use the cash to meet a variety of expenses – foodstuffs, school fees, credit cards, gifts, holidays – all except reinvestment in shares.
Dividend reinvestment is key instrument of accelerating investor returns. Without it, one’s investment only grows as a stock price appreciates or as one directly increases their investments.
The lag in time between dividend announcement and payments is probably a factor. Dividends arrive long after they have been forgotten about and provide an unexpected cash bonus in the middle of the year – and end up being used to meet urgent household bills e.g. most NSE firms pay 3 months after announcement ( and KCB is 4 months this year).
The financial cost of dividend payments by cheques is also expensive for both the companies (e.g. KQ will mail out almost 80,000 cheques a year) and investors (bank charges to clear cheques).
The new CDS system can help solve this problem in that dividend payments can be credited to one’s account – and then can be reinvested later in same stock or other company at the advice of a stockbroker. However, there have been some payment errors, and many investors may still prefer to see and verify their dividend cheques and then bank them and use the cash as they see fit.