What Are Dividend Payouts and How Do They Compare to Other Investments?

On Saturday, February 26, Safaricom shares were trading at 38.81 shillings, and they announced an interim dividend of 0.64 shillings per share. Now, to a common person, these are just a bunch of numbers, but to a dividend investor, this means a lot!

Average investors can build long-term wealth through dividend-paying stocks. You can earn a passive income from the dividend and benefit from capital appreciation as a result.

Over the years, stocks that pay dividends have outperformed those that don’t, which makes it a worthy investment.

But before investing in dividend stocks, it is important to understand what it means, what the payout means, and how you can benefit from their wealth-creating capabilities.

What Are Dividends?

In a nutshell, a dividend is a distribution of a portion of a company’s earnings. These dividends are regularly rewarded to shareholders usually in cash – although sometimes it can also be in form of stock.

There are three types of dividends companies typically pay:

1. Regular dividend – This is the most common type where companies pay a regular dividend consistently over time. These dividends are usually paid on a quarterly basis, although they can also be paid monthly, biannually, or annually.
2. Special dividend – This is a one-time kind of dividend payment. A scenario where this is applicable is after a company experiences a string of highly profitable quarters or because it has sold an asset and doesn’t necessarily have an immediate use for the money. Also, if a company has amassed enough cash to let it sustain its operations, it can pay this type of dividend.
3. Variable dividend – This type of dividend is common in the commodity market such as the oil and gas industry, mining, timber, among others. It is often paid in addition to regular dividends and is settled at fairly consistent intervals. The amount, however, varies depending on a company’s earnings in the prior quarter or year

Companies that pay dividends are evaluated by investors on the value of annual dividends paid relative to the price of the company’s stock – this is known as the dividend yield.

ALSO READ: Dear Entrepreneur, Here Are 10 Principles To Wealth Creation

Investors evaluate companies that pay dividends on the value of annual dividends paid relative to the price of the company’s stock, which is known as the company’s dividend yield.

A stock, for instance, that pays yearly dividends of 0.50 shillings per share and trades for 10 shillings per share has a dividend yield of 5%.

A company’s dividend yield enables an investor to quickly determine how much they can earn in dividends by investing a certain amount.

If, for instance, a stock has a yield of 5%, you know you will earn 5 shillings on every 100 shillings invested, 50 shillings for every 1,000 invested, and so on.

In the case of Safaricom, one Twitter user by the name of Tim Gathima broke down what the share payout means.

Tim notes that going by 2021’s trend and assuming that Safaricom pays a final dividend of 1 shilling, your total dividends will be 1,640,000 shillings for your investment of 38.81 million shillings.

And if you had enough money to buy 1 million shares, your initial investment would be 38.81 million shillings, and your interim dividend this round would be 640,000 shillings.

The dividend payment is slightly above 4% return per annum (assuming no brokerage fees for the share purchase, etc.) which is pretty decent, given that Safaricom is the ‘bluchipest’ of the blue-chip companies.

How Does it Compare to Other Investments?

Tim’s complete thread shows how the yield compares to other different types of investments. Below is how he puts it.

Safaricom shares are currently trading at Ksh 38.81 and they announced an interim dividend of Kshs 0.64 per share.

What does this mean to the average investor? Let's break it down. 🧵

— Timothy (@TimGathima) February 26, 2022

If you invested the money with a fund manager, e.g CiC, whose return last year was a smidge above 9%, your interest payment at the end of the year would have been almost 3.5 million shillings.

“In real estate, an investment of 38.81 million shillings ‘should’ yield close to 270,000 per month (our properties are over-valued), hence the true rental income if you purchase in an upmarket area, the rent would be closer to 150,000 shillings monthly and an annual amount of 1.8 million shillings,” explained Tim in a tweet.

A government paper at 9% would give similar returns to the managed fund returns, roughly 3.5 million per annum. So, with Covid-19, elections, and now the Eastern Europe unrest, which one would you choose, and why?