In a period where investors are not too hopeful of profiting through unrealized gains due to the poor performance of the market, it stands to reason, that the only chance of making profit in the market is to hunt for yields.
Yields can come from investments in bonds and other fixed income securities or from investing in high dividend stocks. Finding dividend stocks to invest in may not be that easy but with the process elucidated below, you can conformably find some dividend stocks that can keep you afloat the market and help you ride the tides in the market.
Dividend Stocks List
The first step in hunting for and evaluating/analyzing dividend paying stocks is to look for list of dividend stocks in Nigeria. There are some sources that provide information on dividends declared and/or paid within a given time period. For example, Nairametrics publishes a “list of dividends declared so far in 2018” from time to time. The corporate action page of the Nigeria Stock exchange website also has such lists. Those can form a basis of your research on dividend stocks.
The unfortunate thing about these lists and other data or information on dividends in Nigeria is that they lack information on dividend yield, dividend payout ratio or dividend growth rate. Those are some of the data that you need to evaluate the different dividend stocks you may select from the list of dividends. Be that as it may, you may be able to gather these required data elsewhere or by doing some minimal or not too complex calculations.
From the list of dividends, compare the dividend yields (where available) among the stocks. If not available, look for the dividend yield of those stocks that may be of interest to you.
Dividend yield is simply an indication of how much a company pays out in relation to its stock price.
Mathematically, it is dividend per share divided by price per share of the company of interest.
Dividend yields of Nigerian stocks can be supplied on demand by Quantitative Financial Analytics, but you have to ask for it, at least for now.
Note that selection should not be based solely on dividend yield as low-priced stocks tend to have high dividend yield and dividend yields tend to rise as stock prices fall.
Dividend Payment History
In looking for dividend stocks, it is advisable to pay attention to the dividend payment history of companies because you would not want to invest in companies that pay dividends once in a while rather than consistently.
Consistent dividend paying stocks are not only dependable for income but also send signals about the financial wellbeing of the company. Unfortunately, there is little or no database that contains information on dividend history of companies in Nigeria, but Quantitative Financial Analysis has the information from 2015 to date.
Dividend Growth Rate
As an investor with the goal of maximizing investment returns, you should not only pay attention to consistency of dividend payments as in dividend payment history, also take note of dividend growth rates.
Dividend growth rate is the annualized percentage change in dividends paid over a period of time, usually yearly.
As a rational investor, you would prefer to invest in companies that grow their dividends from year to year. Meaning that it is better to invest in a company that pays N10 dividend in year one and say N15 in year two than one that consistently pays N10 per share dividend each year. Worst still is a company that pays less dividend in year two than they paid in year one.
Dividend growth is also important because analysis use that information in calculating the future value or price of a stock. Stocks of companies that grow their dividends are usually valued higher than those that do not grow their dividend. By investing in such companies, you do not only benefit from the dividend growth, you also benefit from the increased valuation which gets translated into increased unrealized gain.
Another important variable that you should pay attention to when selecting dividend stock is the payout ratio.
Payout ratio is an indication of what proportion or percentage of a company’s earnings that are paid out as dividend.
If a company has a dividend payout ratio of 45%, for example, it shows that 45% of its earnings for the year was paid to shareholders as dividend that year. Dividend payout ratio is calculated as divided per share divided by earnings per share (EPS) multiplied by 100 to translate it into percentage. Although analysts are divided as to whether a higher dividend payout ratio is better or not.
Some have argued that it is better to retain the money and reinvest it in the company while others are of the opinion that a high payout ratio is an indication that the board of directors of a company have confidence in the financial well being of the company, yet, others think that it shows that the board does not have any meaningful and profitable investment into which to put its retained earnings. From an investors’ perspective, growth-oriented investors seem to prefer that the earnings be retained and reinvested in more profitable ventures in the company while divided or income investors prefer that the earnings be paid out as dividends. Therefore, as a dividend investor, look for companies with high payout ratio.
Calculate Future Dividend
Having gathered the above-mentioned information, the next is to project how much the future dividend will be.
To estimate future dividend, multiply current dividend by 1 plus the dividend growth rate.
For example, Access Bank Plc paid a N0.55 dividend in 2016, and N0.65 in 2017 giving a dividend growth rate of 18%, to estimate the 2018 dividend, multiply 2017 dividend of 0.65 by 1.18 to arrive at N0.77. Another way to project future dividend is to multiply current dividend yield by the dividend growth rate to come up with future dividend yield for the stock of interest.
Though many companies in Nigeria have shown negative dividend growth over time, it is believed that there are still some out there that grow their dividends each year and by using the process enumerated above, you can uncover dividend stocks that are worth your money. Again, if companies know or realize that investors are taking dividend growth into consideration, the tendency to not grow dividends will be curtailed.