Dividends in Kenya: What are they and how do they work?

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Dividends are essential for investors who want to earn from their investments. But what exactly are they and how do they work?

Dividends are the payments that companies make directly to their shareholders out of the profits they generate. It is how companies share profits with their investors.

So if earning passive income is one of your investing goals, then dividends are important. In this article, we’ll dissect them to understand how they work, and how you can take advantage of them to grow your finances.

What are dividends?

Dividends are the profits that companies share with their investors.

Profitable companies usually designate a portion of their profits to be distributed among their shareholders. These payments are what we call dividends.

They provide a way for shareholders to partake in the underlying company’s financial success. And the payments are made directly from the company to the shareholders and can take many forms.

These can be in cash, more shares, or even property – the form it takes depends on the specific company and its resources.

In Kenya, most dividends are cash dividends, which are cash payments made on a per-share basis. So if a company is paying a dividend of KES 3.00 per share, an investor with 1,000 shares will receive KES 3,000 in cash.

It is important to note, however, that dividends are not guaranteed and not all companies pay dividends. Let’s see why this is the case:

Why do companies pay dividends?

To understand why some companies pay dividends, it’s important to decode why others don’t pay them.

Young, small, or unprofitable companies don’t pay dividends because they need to reinvest their finances to keep growing. By doing this, they can grow to a substantial size and become more profitable in the future, translating to higher dividends than if they were to pay them at their current state.

Massive companies, on the other hand, can pay dividends from the profits they make because they don’t need to keep growing. They’ve already reached maturity so they have surplus cash that they can afford to pay to their investors.

This increases their attractiveness to prospective investors because dividends signal that the company is stable and has greater financial strength.

As a result, the dividends help these companies to drive their share price up and become even more valuable in the eyes of the investors.

Suggested: How to Buy Shares in Kenya

Types of dividends

As mentioned earlier, dividends can take various forms. The most common forms of dividends include:

  • Cash dividends– distributed in the form of money paid directly to the shareholder.
  • Stock dividends–  paid out in the form of additional stock in the company. The shareholders receive additional stock on top of what they already own.
  • Property dividends– companies can also use physical assets like real estate to pay their shareholders. This, however, is not as common as cash and stocks.

Dividends in Kenya mostly come in the form of cash payments. Investors receive the payment directly into their bank accounts, which are usually linked to their respective CDS accounts.

For local investors, the government charges a 5% withholding tax, which the paying company deducts and remits on behalf of the investors.

How do companies pay dividends?

Ultimately, a company’s board of directors is responsible for determining the date and the amount of dividend to be paid. The whole process, from profit to payment, takes about four steps:

  1. The company makes a profit - remember, only mature and profitable companies pay dividends. Smaller, growing, or unprofitable companies don’t.
  2. The board of directors approves a specific dividend amount per share.
  3. The company announces (through a press release) when the dividend will be paid, the amount, and the latest date you must own the shares to qualify for the dividend payment.
  4. The company pays dividends to its shareholders.

Most companies in Kenya pay dividends semi-annually although there are some that do it quarterly and others that do it annually. It’s important to be aware of this schedule when choosing your preferred dividend stock.

Why invest in dividend stocks?

  • They can provide a source of additional income - depending on your goals, you can use this payment to either supplement your current income or reinvest it to take advantage of compounding.
  • They are a good sign of the financial strength of the company. Typically, companies that are willing and able to pay dividends demonstrate that they are both mature and profitable. Dividends, therefore, provide a good indicator of how well a company is doing financially.
  • They can also help to safeguard the value of the company in the stock market - Dividend stocks tend to attract more demand than other stocks because of their ability to pay investors. This makes them able to preserve their value and recover fast even in turbulent times.

How to ID and buy dividend stocks

Just as is the case with non-dividend stocks, the best way to identify good dividend stocks is by looking at the fundamentals.

These include factors like the strength of the company’s business model, the size of its market, its financial results, the track record of the management, etc.

In short, focus on the financial health of the organization. A good way to identify good dividend shares is to look for blue-chip stocks, which are companies that are known to be dominant in their operations and financials.

This will help you to eliminate most companies and leave you with only the top options. From there, it’ll be a game of comparison as you cut the list down to the best choices.

Over To You

As you can see, dividends provide a great avenue for investors to not only earn passive income from their assets but to also invest in stocks that are in great financial health.

In Kenya, companies that pay dividends typically do it twice – after announcing their half-year results. So if your objective is to earn an income (either to supplement your current income or for reinvestment) dividend stocks are a great place to start.

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