The Applicability of the Constant Dividend Model for Companies Listed at the Nairobi Stock Exchange

Abstract

The decision to pay out earnings or retain dividends has been a subject of debate for many scholars. This research paper tests the applicability of constant dividend model from companies listed at the Nairobi stock exchange. Data was collected from annual reports and share price schedules obtained from Nairobi stock exchange and Capital market Authority for a sample of 18 companies that paid dividends consistently from 2002 to 2008. The data was then analyzed by re-computing the dividends that should have been paid if the dividend constant model was applied. This recomputed figure was later compared to the dividends as paid out by the companies during the period of study. Paired sample t-test statistic was performed to determine whether there is a significant difference between the two dividend figures. The findings of the research established that the dividend model was not employed by the companies listed at the Nairobi stock exchange. Most firms adopted a stable and predictable policy where a specific amount of dividend per share was paid each year. In some years, there was a slight adjustment of the dividend paid after an increase in earnings, but only by a sustainable amount. The study shows that the relationship between the stock market prices and the dividend paid from the constant dividend model is uneven from one year to another and where there was a relationship it was insignificant.