Highlighting The Role of Capital Formation and Dividends in Building Sustainable Wealth
Coronation Registrars Limited on Thursday, August 8, 2024, hosted a webinar themed “The Role of Capital Formation and Dividends in Building Sustainable Wealth,” where experts revealed how Capital Formation and Dividends can unlock the Power of Sustainable Wealth, EDET UDOH writes.
The primary objective of the webinar was to position Coronation Registrars Limited as a prosperity partner in managing and supporting both investors and companies in executing their strategic financial initiatives in ensuring and promoting sustainable wealth creation through its various digital solutions and shareholder benefit and at the end, serve as a platform for Coronation Registrars to showcase its various range of products that can assist investors in making informed investment decisions.
The webinar was also aimed at educating, informing and empowering investors and businesses with the knowledge and tools for achieving long-term financial stability and growth and navigating the complex and volatile market while emphasizing the critical role that capital formation and dividends play in building sustainable wealth..
The Keynote Speaker, Mr. Oluseyi Owoturo, President and Chairman of the Council, Institute of Capital Markets and Registrars (ICMR), defined capital formation as generating and accumulating financial resources to invest in productive assets.
He said “It involves the mobilization of savings and borrowings and their transformation into investments that drive economic growth. For individuals, this means systematically saving and investing money into various financial instruments such as stocks, bonds, treasury bills, commercial papers, promissory notes, derivatives, real estate, or business ventures. Effective capital formation relies on prudent financial planning, budgeting, and a deep understanding of investment opportunities.”
He defined dividends as “A portion of a company’s profits distributed to its shareholders, noting that they are tangible returns on investment for shareholders, providing a steady income stream in addition to any capital gains realized from the appreciation of the stock’s value. Dividends can be reinvested to purchase more productive assets, thereby compounding returns over time. For investors focused on building sustainable wealth, dividends are a crucial component. They provide a regular income that can be reinvested to further enhance wealth.
He posited that the synergy between capital formation and dividends is vital in the pursuit of sustainable wealth.
According to him, “Capital formation lays the groundwork by providing the necessary funds to invest, while dividends offer a consistent return on those investments. Reinvesting dividends accelerates the growth of capital, creating a powerful compounding effect that enhances wealth over time.”
Focusing on dividend-paying investments, he stated, “can offer a balance between growth and income, reducing reliance on market fluctuations and providing a measure of financial security. This approach aligns with the principles of sustainable wealth building, emphasizing long-term growth, risk management, and financial resilience.”
Process of Capital Formation
First, it is expected that mobilized savings should be invested in various productive assets including Physical Capital: Investments in physical assets such as machinery, buildings, infrastructure, and technology allow these assets to be used in the production of goods and services, contributing directly to economic growth.
Human Capital takes care of the education, training and healthcare that enhance the productivity and skills of the workforce.
Financial Capital: Financial instruments such as stocks, bonds, mutual funds, and other securities provide the necessary funds for businesses to expand and innovate.
Second, once the savings are generated, the next step is to mobilize these savings for investment. This involves transferring savings from those who have excess funds (savers) to those who need funds for investment (borrowers).
Financial institutions like banks, credit unions, and investment firms play a critical role in this process by facilitating the flow of funds from savers to investors.
Third, the first step in capital formation is the generation of savings. Savings are the portion of income that is not consumed but set aside for future use. For individuals, this involves budgeting and financial planning to ensure that a part of their income is saved regularly. For businesses, savings come from retained earnings, which are profits not distributed as dividends but kept within the company for future investments.
Element of Capital Formation
Government Policies and Incentives: This can significantly influence the process of capital formation. Policies that promote savings and investment, such as tax incentives, subsidies, and favourable regulatory environments, can encourage both individuals and businesses to save and invest more. Infrastructure development, education, and healthcare are also areas where government investment can facilitate capital formation.
Reinvestment of Earnings: A key aspect of sustaining capital formation is the reinvestment of earnings. Profits generated from investments are often reinvested to expand productive capacity further. This reinvestment cycle helps in compounding growth and accelerating the process of capital formation over time.
Capital Market and Financial Instruments: Capital markets, including exchanges (stock, commodities, derivatives, etc) and bond markets, are vital in the capital formation process. They provide a platform for raising long-term capital through the issuance of stocks, bonds and other derivatives. The development of sophisticated financial instruments and markets allows for more efficient allocation of resources and risk management.
Impact of Capital Market
Capital Market enhances economic growth, job creation and technological advancement. By increasing the stock of the capital market, economies can enhance their productive capacity, leading to higher output and economic growth.
Investment in new ventures and expanding businesses create job opportunities, reducing unemployment and improving living standards.
Capital formation supports technological innovation, leading to more efficient production processes and the development of new products.
Sources of Capital Formation:
These include personal savings, like household savings and retirement funds, corporate savings, government savings, external borrowing, capital markets, banking systems, and non-banking financial institutions.
Challenges to Capital Formation
These are low savings rates, inefficient financial systems, political and economic instability, inequality, investor preferences and innovation.
Low Savings Rates: Inadequate savings can limit the funds available for investment.
Inefficient Financial System: Weak financial institutions and underdeveloped capital markets can hinder the mobilization and allocation of savings.
Political and Economic Instability: Uncertainty (about fiscal and monetary policies, inflation, interest and exchange rates) and instability can deter investment and disrupt the capital formation process.
Inequality: High levels of income and wealth inequality can lead to uneven capital formation, where a small portion of the population controls most of the capital.
Investor Preferences: Investors may prefer investing in established companies or sectors with perceived lower risks, making it challenging for new or high-risk ventures to attract funding.
Innovation: Keeping up with technological advancements and investing in innovation requires significant capital, which may be difficult to secure.
Definition of Sustainable Wealth
In an article titled “The Business Case for Sustainable Wealth Creation: A Conscious Mindset Approach” published in Global Banking & Finance, Mirjana Boznovska described sustainable wealth as … ”Future benefit that sustains future life. Sustainable wealth means consumption or the using up of benefits must equal additional investments that increase wealth, so wealth is maintained and sustained.”
Sustainable wealth is not just about numbers. Neither is it just about accumulation. It is about the strategic orchestration or numbers over time. It involves growth, management, preservation, and often overlooked element – transfer.
Linking Capital Formation and Dividends in Sustainable Wealth Creation
Capital formation and dividends are intrinsically linked in the process of sustainable wealth creation. Capital formation involves generating and accumulating financial resources through savings, investments, and retained earnings.
These resources are then invested in productive assets, fueling economic growth and generating profits.
Dividends on the other hand, represent the distribution of a portion of these profits back to shareholders.
Capital formation and dividends reinforce each other in several ways to support long-term growth in areas like reinvestment and dividend payment.
Reinvestment: Earnings retained by companies are reinvested in growth opportunities, such as expanding operations, developing new products, or acquiring new assets or mergers and acquisitions. This reinvestment drives future profitability and increases the company’s value.
Dividend Payments: Regular dividends provide immediate returns to shareholders, which can be reinvested in the same company or other investment opportunities. This reinvestment by shareholders creates a cycle of capital formation and growth.
Achieving sustainable wealth creation requires a delicate balance between reinvestment and shareholder returns. A balanced approach involves setting a sustainable dividend policy and communicating with investors.
Setting a Sustainable Dividend Policy: Companies should establish a dividend policy that aligns with their long-term growth strategy. This includes determining a payout ratio that allows for sufficient reinvestment while providing attractive returns to shareholders.
Communicating with Investors: A clear communication with investors about how earnings are being used for reinvestment and the rationale behind dividend decisions, helps build trust and support among investors.
Strategies for Sustainable Wealth
These include long-term perspective; focus on quality investments, diversification, regular review and adjustment and education and awareness.
Long-term Perspective: Adopting a long-term investment perspective, rather than seeking short-term gains, aligns with the principles of sustainable wealth creation. This includes reinvesting dividends to benefit from the compounding effect over time.
Focus on Quality Investments: Prioritizing investments in high-quality companies with strong fundamentals, reliable earnings, and a history of dividend payments ensures a steady income stream and growth potential.
Diversification: Diversifying investments across different asset classes and sectors reduces risk and enhances the potential for stable returns. This applies to both personal portfolios and corporate investments.
Regular Review and Adjustment: Continuously reviewing and adjusting investment strategies based on market conditions, economic trends, and personal financial goals helps maintain a path toward sustainable wealth.
Education and Awareness: Staying informed about financial markets, investment opportunities, and economic developments empowers investors to make informed decisions that support long-term wealth creation.
He concluded that “Understanding and leveraging the power of compounding and the role of savings and dividends in capital formation is essential for anyone seeking to build and maintain sustainable wealth. By combining disciplined saving and investing with a strategic focus on dividend-paying assets, individuals can create robust and resilient financial foundation. This approach not only supports personal financial goals but also contributes to broader economic stability and growth.”
During the Panel session, Mr. John Brigss, Regulatory Compliance Specialist, Securities and Exchange Commission (SEC) explained how the SEC ensures fair and transparent opportunity for all investors in ensuring capital formation processes.
Capital formation goes beyond just cash, there are other aspects of capital such as expertise amongst others. If you look at the venture capital process, you see that people bring their expertise and then, of course, cash comes in.
For wealth sustainability, the capital market is the best place because that is where you have medium and long-term capital. What is the regulator doing, it ensures we have a fair, efficient, and transparent market. All securities that are traded are expected to register with the Securities and Exchange Commission (SEC). Registration with SEC is key for proper monitoring and supervision of the market.
According to him, “In regulating the market, the Commission undertakes the following activities in order to protect investors, market operators and also ensure market integrity. Regulation is carried out through deployment of the following tools: Registration of securities and market intermediaries to ensure that only fit and proper persons/institutions are allowed to operate in the market.
“Instruments and persons registered in the market are: Securities/Commodity Exchanges/Capital Trade Points, Futures, Options and Derivatives Exchanges, Depository, Clearing and Settlement agencies, Capital Market Operators:, Issuing Houses, Securities dealers/Stock brokers/Sub- brokers, Registrars/Transfer agents, Trustees, Reporting Accountants, Solicitors, Investment Advisers etc.
“Under Securities, we have Equities, Debentures, Debt instruments and Collective investment schemes. Inspections are either done “onsite” or “off-site”. The Commission, at regular intervals, calls for information from capital market operators. It also undertakes and conducts inquiries and audits of any participant in the market whenever necessary.
“Surveillance is carried out over exchanges and trading systems to forestall breaches of market rules as well as deter and detect manipulations and trading practices which are capable of causing market disruption.
“SEC is responsible in the investigation of any alleged violation of the laws and regulations governing the capital market and enforcement of sanctions where appropriate. Enforcement of actions is taken against market operators who are found wanting after the investigation is carried out, in minor cases, an all-parties meeting is convened by the Commission where it mediates between parties involved in a dispute. However, if the case is serious or where no resolution is reached or a party fails to comply with a directive given at the all-parties meeting, the defaulting party will be called before the Administrative Proceedings Committee (APC), which is a quasi-judicial court, with only civil jurisdiction.
“Enforcement action may be in the form of payment of fine, ban, suspension or even forwarding the case to the Nigeria Police Force (NPF), Economic and Financial Crimes Commission (EFCC) or the Attorney–General of the Federation (AGF) where allegations are found to be criminal. Rule-making by the Commission as developments occur. This is to ensure that the Commission meets up with international best practices.”
Also speaking during the webinar, Chiamake Ugo-Obidike, Chief Client Officer, Coronation Registrars Limited, spoke on how Coronation Securities is leveraging Technology in Capital formation processes, just as she highlighted Coronation Registrars’ various offerings and the need for investors to leverage the opportunity to broaden their investment knowledge.
According to her, Technology is very key in driving capital formation in the Capital Market among investors. In Coronation, we are very keen on technology because that is what makes for a seamless customer experience. In Coronation we have technology addressing investor’s different areas of investment journey – from the way we communicate with them, they don’t need to come to our office. We have a 24/7 contact centre that is always available to manage enquiries, requests, etc., as the case may be.
“We also have a portal where they can have access to their investment portfolios, where they can see their latest information such as their dividend history among other updates. We are a leading provider of securities register and data administration services in Nigeria. Through world-class technology solutions, we have pioneered the introduction of new products such as electronic polling, e-dividends, e-bonus, e-notifications and e-lodgments.
“We utilize our specialist team and innovative technology to provide capital raising services, maintain your share register, administer meetings and manage your investors with the highest of standards, Mrs. Ugo-Obidike stated
She pointed out that the key to successfully managing your investor base is having access to relevant data and insights.
“We provide our clients with the tools and intelligence to manage their relationships with their shareholders and wider stakeholder audiences.
‘We understand the importance of maintaining up-to-date records of our client’s shareholders. We ensure that our records are adequately updated with changes to shareholder’s data,” she added.
