It’s tough to beat a company that pays out a regular dividend.
They generate income for shareholders. They typically boast sharp management teams. And, historically, their shares have outperformed their non-dividend-paying counterparts.
The Nairobi Securities Exchange is chock full of dividend stocks. Almost all companies listed on the market presently pay a dividend.
But not all dividend stocks are created equal. Some don’t yield much in relation to their price. Others pay out so much of their earnings that it hampers their future growth. And some disappoint shareholders with frequent dividend cuts.
So, which Kenyan stocks offer the most substantial, reliable, and growing income stream?
Let’s take a closer look.
1. High Yield
We’re going to start by looking at dividend yields. This is simply the most recent 12 months worth of dividends divided by its share price.
Dividend Yield = Dividend per share over preceding 12 months ÷ Current share price
So, a dividend yield is a bit like the yield of a bond, but unlike bond payments, dividends can (and should) grow as years go by.
Here are some of the highest-yielding Kenyan stocks:
|Stock||Ticker Symbol||Dividend Yield|
|East African Cables||EACL:KN||7.67%|
|Barclays Bank of Kenya||BCBL:KN||5.81%|
|British American Tobacco - Kenya||BATK:KN||5.70%|
|Pan Africa Insurance Holdings||PAIL:KN||5.56%|
|REA Vipingo Plantations||RVPL:KN||5.18%|
|KCB Bank Group||KNCB:KN||4.81%|
2. Payout Ratio
A great yield is nice but if a company can’t afford to continue paying it when times get tough the value of the stock is less than it might seem at first glance.
The payout ratio is one way to measure the security of a dividend. It shows us what percentage of earnings a company pays to shareholders in the form of dividends and how much it keeps for a rainy day or to re-invest back into the business.
To calculate it, we simply divide dividends per share by earnings per share.
Payout Ratio = Dividends per share ÷ Earnings per share
The lower the ratio, the more likely it will be for the company to continue paying the dividend at the same level or higher. A high payout ratio, on the other hand, may indicate a dividend in danger of being cut.
The chart below shows the current payout ratios for Kenya’s highest-yielding stocks.
|Stock||Ticker Symbol||Payout Ratio|
|REA Vipingo Plantations||RVPL:KN||17.4%|
|Pan Africa Insurance Holdings||PAIL:KN||43.3%|
|KCB Bank Group||KNCB:KN||46.2%|
|East African Cables||EACL:KN||57.5%|
|Barclays Bank of Kenya||BCBL:KN||62.1%|
|British American Tobacco - Kenya||BATK:KN||98.5%|
When I screen stocks, I typically consider a payout ratio above 60% to be a warning sign of a stagnating dividend, or potentially one in danger of being reduced. There are six stocks in the above chart with payout ratios in that territory. Let’s remove them from our list and move on to the next item on our Dividend King checklist.
3. Dividend Cuts
While the payout ratio is a fairly good indicator of a possible dividend cut, it tends to overlook companies whose policies dictate that dividends be maintained at a fixed percentage of earnings.
This is why I also like to see whether a company consistently pays a dividend and whether it has cut its dividend at any point during the most recent five years.
The chart below shows exactly this.
|Stock||Ticker Symbol||Dividend Paid for 5 Straight Years Without Cut?|
|KCB Bank Group||KNCB:KN||Yes|
|REA Vipingo Plantations||RVPL:KN||No|
|Pan Africa Insurance Holdings||PAIL:KN||No|
|East African Cables||EACL:KN||No|
Many income investors can’t abide dividend cuts, and for the purpose of this article, neither can I. Any company that has cut its dividend over the past five years (or hasn’t paid one each year) isn’t fit to be a dividend king.
4. Dividend Growth Rate
Ideally, companies will increase the size of their dividend in line with earnings growth as years go by. This can make such stocks a fantastic source of income. Suppose you bought KES10,000 worth of a stock that traded at a dividend yield of 4.00%. And suppose that stock increased its annual dividend at a rate of 15% per year for five years. At the end of those five years, the yield on your original KES10,000 investment will be equivalent to 800 shillings per year or 8.00% annually. And the value of your shares will have likely doubled, too!
The formula for calculating a dividend’s five-year growth rate is a little complicated, but I’ll write it here for you number crunchers.
Growth Rate = (Most Recent Dividend ÷ Dividend Five Years Ago)(0.2) – 1
Or you can also use this handy online calculator.
So, which Kenyan stocks pay a high, safe, and growing dividend yield? Check out this chart.
|Stock||Ticker Symbol||5-Year Dividend Growth Rate|
|KCB Bank Group||KNCB:KN||22.1%|
I generally like my investments to grow at a rate of at least 15% per year. An investment with this rate of return will double in value every five years. If we use this as our hurdle rate, only two stocks make the cut – Equity Bank and KCB Bank Group. In my view, they are Kenya’s Dividend Kings.
What Do You Think?
How important are dividends to you? What criteria do you use when deciding whether to add a dividend stock to your portfolio? Let us know in the comments!