Effect of Dividend Payout on the Stock Returns of Firms Listed at the Nairobi Securities Exchange

Abstract

Dividend policy is a broadly debated topic within the scope corporate finance and so is the amount of research that has gone into it with respect of it effect on the overall value of the shareholder’s stake in the firm. To-date, it is still unconclusive as to the influence dividend policy has on the market value of equities specifically stock prices of listed companies. The study is in the Kenyan context at the NSE, the period under review ranges from 2018 to 2022 encompassing 58 of the listed firms in the NSE. The objective of this study was to find out the extent to which dividend payout influences total stock returns among firms listed on the Nairobi Stock Exchange (NSE). The study design was of a descriptive nature using available secondary data from companies listed on the NSE. The data collected was from the annual reports of the firms between the financial years 2018 to 2022. Different tests including multi-collinearity, normality tests and other diagnostic tests were done, in addition, the study also included tests of significance, autocorrelation test and heteroskedasticity. Data analysis was done using multiple regression analysis. Descriptive statistics were presented through tables, showcasing measures like mean, median, and standard deviation. The study findings confirmed that there is a positive effect of dividend payout on the total stock returns of the firms. From the correlation analysis, it was evident that dividend payout ratio has a weak positive correlation of 0.145 with total stock returns and this correlation is statistically significant at 0.017. The findings also confirmed that liquidity exhibits a weak positive correlation of 0.142 with total stock returns though statistically insignificant. Leverage depicts a very weak positive correlation with total stock returns at 0.065 that is also statistically insignificant while profitability depicts a weak positive correlation with total stock returns at 0.234 that is also statistically significant at 0.005. In addition, the firm size demonstrates a very weak positive correlation of 0.122 with total stock returns, a correlation that shows the strongest level of significance at .000. At 0.558, the R coefficient is deemed a moderately positive, which implies that firm size, liquidity, leverage, profitability, firm size, and dividend payout ratio positively affect total stock returns of the firms listed at the NSE. In addition, it was confirmed that independent variables including dividend payout contribute to 29.6% value in total stock returns in the firms. The study concluded that dividend payout under different control measures such as leverage, profitability, firm size and liquidity affect the total stock returns among firms listed within NSE. The study recommended the need for companies listed within NSE to adopt effective dividend payout management, liquidity, and leverage to promote their total stock returns. This can be done through formulation of effective dividend policies that foster an environment supportive of fair market practices and efficient capital allocation, considering potential trade-offs between liquidity, leverage, and long-term shareholder value. Furthermore, the study recommends ongoing research to adapt strategies to evolving market conditions and regulatory environments, ensuring the relevance and effectiveness of dividend policies within the NSE.