Dividends are one of the reasons many Nigerians love stocks. The idea is simple: own shares in a company, and if the company declares a dividend, you may receive a portion of the profits.
The details are where investors start stepping on rakes.
What is a dividend?
A dividend is a cash distribution from a company to its shareholders. If a company declares ₦2 per share and you qualify with 1,000 shares, your gross dividend is ₦2,000 before any applicable deductions or processing realities.
Companies do not have to pay dividends every year. A dividend depends on profit, cash, board decisions, shareholder approval where applicable, regulation and the company's need to reinvest.
The basic formula
Dividend yield is generally annual dividend per share divided by current share price, multiplied by 100.
If a company pays ₦4 per share annually and trades at ₦80, the yield is 5%.
What counts as annual dividend?
Suppose a company paid ₦2 interim dividend and ₦3 final dividend. Total annual dividend is ₦5. If the share price is ₦100, yield is 5%.
If you only look at the latest ₦3 payment, you may calculate the wrong yield. Always understand what period the dividend figure represents.
Yield changes when price changes
If the company still pays ₦5 and the share price falls from ₦100 to ₦50, the yield rises from 5% to 10%.
The company did not increase the dividend. The yield rose because the stock price fell.
The dividend trap
A high yield can be attractive, but perhaps the market expects the dividend to be cut. If next year's dividend falls sharply, your attractive yield was based on a payment that was not sustainable.
Look at payout ratio
Payout ratio tells you how much of earnings are being distributed. If EPS is ₦20 and dividend is ₦10, payout ratio is 50%. If EPS is ₦10 and dividend is ₦10, payout ratio is 100%.
Some businesses can sustain high payouts. Others need to retain significant earnings.
Dividend yield is not total return
If you earn a 5% dividend yield but the stock falls 20%, your total return may be negative. Dividend income is only one component of investment return.
What makes a dividend attractive?
Consider consistency, growth, payout ratio, cash flow, earnings, balance sheet, business quality and valuation.
The best dividend opportunity is not necessarily the highest percentage. It may be the company whose dividend is most sustainable relative to the price you are paying.
Qualification and payment dates
To receive a dividend, you need to qualify according to the company's corporate action timetable. Pay attention to qualification date, closure date, ex-dividend date and payment date.
Do not buy a stock after the relevant cutoff and expect the market to apologise to you with free money.
Use Moniwise for dividend research
Moniwise helps investors track dividend information, compare companies and watch announcements. That does not remove risk, but it makes the research process less chaotic.
Disclaimer: Educational content only. Dividend payments can change and should be verified from official announcements.