An integral part of life is the reward we get from the actions we take and decisions we make. For the landowner the reward is rent; for the employee, the reward is a salary or wage; for the capital owner, the reward is interest; for the business owner, the reward is profit; and for those interested in owning stocks (shareholders), they can look to a dividend as being their reward.
As a shareholder, the amount of shares you own determines the amount of dividend you will be able to get, and the dividend you get will be critical to your ability to create wealth on the stock market. This article is aimed at providing Millennials and GenZs in Nigeria with a framework on the concept of dividend investing, why it is essential for wealth creation, and insights into some of the top dividend stocks on the Nigerian Stock Exchange (NGX).
What is Dividend Investing?
In stock investing, there are two ways in which a shareholder can gain on his or her stock investment and they are through capital gains (price growth) and dividends. Dividend investing simply involves a strategy where an investor is focused on investing in a company that pays steady and consistent dividends each year.
A dividend represents the share of the profit made by a publicly-traded company which is paid to a shareholder each year. Dividends are tangible benefits an investor can gain from a share they own, and a company’s ability to consistently pay a dividend is a key indicator of its financial health and sustainability.
To properly value and select the right stock, an investor has to look at the fundamentals of a company’s stock by performing qualitative and quantitative analysis. In performing stock analysis (i.e. qualitative and quantitative) an investor who focuses on a dividend investing strategy needs to be fixated on a key indicator known as the dividend yield of the shares owned. The dividend yield is simply the ratio of the dividend paid by a company to the price of the share. To illustrate, if you own 100,000 shares of Company ABC which sells at a price of N10 per share and pays a dividend of N1 per share, the dividend yield would be 10% (i.e. 1/10*100). Also, the total amount received by the shareholder based on the dividend paid and share owned would be N1,000,000 (i.e. 100,000 shares * N1 in dividend).
Dividend investing has shown itself to be a form of stock investing that guarantees an investor with tangible and steady income through dividends paid every year by companies. It is important when selecting companies’ stocks for the sake of dividends, that an investor focuses on stocks with a couple of things, with regards to the nature of the stock and the strategy required. As a rule, a dividend investor must focus on a stock with strong fundamentals (i.e. qualitatives and quantitaives), steady dividend growth, longevity in terms of operations; and when all these are noted, a dividend investor must be willing to accumulate a high volume over time of such stock, because that is what guarantees his or her ability to gain properly from dividends.
A good example of a dividend stock that meets the following requirements above is the popular Coca-Cola company, which has strong fundamentals, a product everyone wants and pays for, and good longevity in terms of business operation. Coca-Cola has paid a dividend since the 1920s and has seen dividend growth consecutively for the past 58 years when it comes to dividends.
3 Dividend-Paying stock examples on the NGX
Dividend investing as a strategy can be used all around the world, and as a Millennial or GenZ investor, you might be thinking of how you can make good use of this strategy in Nigeria. Below are examples of some of the dividend-paying stocks on the Nigerian Stock Exchange (NGX) you can get familiar with today.
1. Zenith Bank: Zenith Bank is a company focused on the business of banking and other financial services (some of which include deposits, loans, and foreign exchange transactions). In operations since the year 1990 under the guidance of Chairman and founder Jim Ovia, Zenith Bank is one of the top banking institutions in Nigeria, and the Nigerian Stock Exchange. It also happens to be one of the 6 banks in Nigeria which account for 85% of all banking industry profits in the country.
As one of the reliable dividend-paying stocks on the NGX, Zenith Bank has paid a dividend for over 15 years since it became a public company in 2004. In the past 5 years, Zenith Bank has paid a dividend that has grown from about N2.5k to N3 per share with average dividend yields of 10-15%. Zenith Bank has seen its assets grow by 78% from N4.7 trillion in 2016 to N8.4 trillion in 2020 and has also seen profit growth by 78% from 129 billion in 2016 to 230 billion in 2020. Zenith Bank’s share price has not exceeded N40 per share in the last 5 years.
2. MTN: MTN is a telecommunications giant which has been in operations in Nigeria since 2001, offering services such as cellular, data, and other related network services. MTN operates in a telecommunications industry that is a form of oligopoly in Nigeria and together with 3 other telecommunications companies which are Airtel, 9 mobile and Glo, accounts for more than 95% of the market share of this industry.
MTN became a public listed company in Nigeria in 2018, and for many years prior, it operated as a profitable private company. Since being a public company, MTN has paid a dividend for the past 2 years at a dividend range of N7.4-N9.4 per share and a dividend yield range of 5-6% per share. MTN’s assets have grown from N941 billion in 2018 to N1.9 trillion in 2020, and its profits have grown from N145 billion in 2018 to N205 billion in 2020. MTN’s share price has not exceeded N200 per share since it went public in 2018.
3. United Bank for Africa: United Bank for Africa (UBA) is one of Nigeria’s premier banking and financial services companies. In operations since 1961, and overseen by its Chairman and majority shareholder, Tony Elumelu, UBA is another of the six commercial banks in Nigeria that account for 85% of the profits in the banking industry.
UBA has been publicly listed since 1971 and is a reliable dividend-paying stock. In the past 5 years, it has averaged a dividend yield above 8% and has seen growth in assets from N3.5 trillion to N7.6 trillion. UBA’s profits have also grown from N72 billion to N113 billion from 2016 to 2020. UBA’s share price has not exceeded N20 per share in the last 5 years.
Beyond the 3 examples given above, there are many dividend-paying stocks listed on the NGX, and one’s ability to properly value and select stocks can be the difference with regards to the potential for wealth creation. Dividend investing represents a strong and stable means for tangible gains which a person can get from the stock market, and the information provided throughout the article is a good starting guide for anyone interested in creating wealth through stock ownership.