Kenya’s Dividend Kings: Two Stocks for Income Investors

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.

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:

[table id=179 /]

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.

[table id=180 /]

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.

Photo by Travis S.
Photo by Travis S.
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.

[table id=181 /]

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.

[table id=182 /]

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!

18 thoughts on “Kenya’s Dividend Kings: Two Stocks for Income Investors”

  1. I’m not an expert here but shouldn’t we be looking at increasing share value instead of giving stock-holders the money they invested back in bits in the name of dividend? I read about that in a Richard Branson book and it made a lot of sense.

    1. I share your views, and I must say here that for income investors it seems a perfect opinion. However, it might not hold for speculators who naturally consider price movements. Therefore, I will conclude that it all depends on which class you belong to as an investor.

      1. Right on, Remi. Price gains and dividends are not entirely unrelated, though. The two stocks identified in this article look as though they will pay a healthy dividend AND post nice share price gains over the medium to long-term.

    2. You’re correct, Slug. Capital gains or share appreciation is where most investors will make the bulk of their returns. But dividend-paying stocks tend to outperform stocks that do not pay a dividend. So, it’s a useful metric to look at even if you’re primary goal is capital appreciation – not income.

    1. Sorry, I forgot to include that, Marc. The dividend yield and payout ratio is calculated on the most recent 12 months reported by the company. The dividend cut and growth rate is based on the most recent five years reported by the company. For most, this period is from 2007-2012.

      1. In developed markets clientelle effect is quite evident. There are those inclined to dividend paying stocks eg pensioners, others capital gains(no guarantee). When managers increase dividends, its a signal of good things since they are insiders. Investors should follow with the right action(buy/sell) depending on the type of signal

  2. Spot on. I think that the signalling factor plays an important role in Kenya’s case. The local investor is dividend oriented and therefore generous dividends tend to be rewarded with price appreciation and vice versa. The sustainability of the dividends should then be a key policy issue for the listed entities.

  3. Payout ratio-
    Hello again, Ryan – On a higher ratio above 60%, it could be that sometimes mature companies have attained critical mass, and there’s nowhere to invest their excess cash and create value per dollar retained. In that case, the only option is to pay the shareholders – with the idea that the latter would find a higher yield for their money elsewhere. Case in point: Bamburi Cement – the industry is already in over-capacity and looking for new markets in other regions. Same thing for tobacco. Contract manufacturing (for other regions) now represents a good portion of BAT’s revenues. But again, this is just my analysis from my little condo in Canada… I may be wrong…

    1. I think your analysis from your little Canadian condo is right on the mark, Christian. It’s better for management of mature companies to return cash to shareholders than to hoard it or invest it in low-return vanity projects.

  4. Do you therefore suggest that the cooperative bank share in kenya is a bad share and the Equity bank share is a good catch. Have you looked well into the matter?

  5. Hi guys,
    Thanks for this insight. very helpful.
    please assist, am not able to view these tables mentioned in this articles? How do I access them?
    Rgrds
    MASESI

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