The forces of privatization, liberalization and globalization, combined with the rapid advancements in information technologyWhy have led to intense competition in all sectors of business in Kenya.
Both local and international firms find themselves in a state of confusion, uncertainty and apprehension. To thrive in this competitive landscape, companies must enhance their value. Financial managers are tasked with making critical business and financial decisions that align with the goal of maximizing shareholders’ wealth and increasing the firm’s overall value. In this context, profitability plays a crucial role.
Profit is the primary economic driver for firms, which serves two main purposes. It can be retained within the firm for future growth, or it can be distributed to shareholders. Distribution to shareholders can take the form of dividends or through the repurchase of outstanding shares. The concept of share repurchases is where a company decides to buy back its own shares.
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However, of greater significance is the aspect of dividend payment. Numerous research studies have attempted to explore the intricacies of dividend policy. Despite these efforts, the question of what influences corporate dividend policy remains ambiguous. Dividend policy holds immense importance for an organization as it reflects its financial strength and provides insights into the company’s growth prospects. Potential investors often base their investment decisions on the information conveyed through dividend payments. Consequently, a deeper examination of this contentious issue, which continues to divide scholars and investors, is warranted.
Given that the well-being of management is often determined by the satisfaction and wealth of shareholders, establishing and maintaining a consistent dividend yield over an extended period can be highly advantageous for financial experts. According to a report published in 2022 by Economic Times magazine, dividend yield is a financial ratio that quantifies the amount of cash dividends distributed to shareholders relative to the market value per share. This is calculated by dividing the dividend per share by the market price per share and then multiplying the result by 100 percent.
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When an investor is considering an investment, they are often swayed by the dividend yield offered by the potential companies in which they are interested in purchasing shares. In the long run, this affects the decision-making behavior of investors when choosing to invest in shares, especially in comparison to other available investment options in Kenya.
Upon examining several researches, it becomes evident that there is a positive correlation between dividend yield and the dividends paid by companies. In essence, a stock may have a higher market price, but if it offers relatively lower dividends, its dividend yield tends to be lower. This, in turn, can significantly impact the informational value of the dividend towards external stakeholders.
Therefore, for Kenyan investors seeking to invest in the equities market that guarantee consistent dividends, they are more inclined to opt for high-yielding stocks. This choice affirms their confidence in the reliability and predictability of returns on their investment.
In summary, an uptick in dividend yield within the stock exchange serves to boost the confidence of both existing and prospective investors. Investors are positively inclined toward companies that offer higher dividend yields, making such companies more attractive for investment.
