Effect of Dividend Payout on the Financial Performance of the Firms Listed on Nairobi Securities Exchange

Abstract

Corporate dividend payout policy has been a concern in finance over an extended period. Scholars argue that share strategies are all alike and that there is no specific strategy that can raise investors capital in ideal principal markets. For this reason, dividend policy is among the most discussed topics in business investment and among many academics. Despite the fact that companies continue to pay dividends, it remains unclear on its effect on financial performance. This study therefore sought to establish the effect of dividend payout on the financial performance of the firms listed at Nairobi Securities Exchange. Specifically the study focused on the amount of dividends paid, Earnings per share and the control effect of leverage and retained earnings. The theories adopted by the study include Dividend Relevance Theories, Dividend irrelevance theory and Information signaling effect theory and Bird-in-the-Hand Theory. The study adopted an explanatory study design. The population of the research was the 66 listed firms at the NSE by the year ending December 2016. A census was conducted on all the 66 listed firms. Correlation and regression analysis was conducted on secondary data collected for five years. The results revealed that the amount of dividends paid by firms listed at NSE have a positive and significant effect on the financial performance of the firms, Earnings per Share of the firms listed at NSE have a negative but not significant effect on the financial performance of the firms, retained earnings has a positive and significant effect on ROA of the firms listed on Nairobi Securities Exchange and the effect of using leverage ratio was negative but not significant. The study recommends that since the amount of dividends paid affect financial performance of firms listed at Nairobi securities exchange positively, the study recommends that the firms listed at NSE can consider revising their dividend payout policy so as to allow for payment of more dividends especially when there is a need to attract more investors with an aim of improving the financial performance in terms of return on assets. The study also recommends that since retained earnings positively affects financial performance of firms listed at NSE; the study also recommends that firms listed at NSE can consider revising their investment decisions and policy to use more of retained earnings in financing decisions than other modes of financing such as the use of debts and shareholders’ equity.