The Effect of Dividend Policy on Financial Performance of Companies Quoted at the Nairobi Securities Exchange

Abstract

The topic of dividend policy has been the most controversial subject in modern finance to the extent of being referred to as a “puzzle” by some scholars. Several dividend theories have been advanced as to whether dividend payment is relevant or irrelevant. It is well documented by many financial researchers that dividend changes are positively associated with profitability of many firms. According to many scholars, dividend policy practices of many corporate bodies signal firm’s performance even though there is no unanimity of theoretical and empirical researchers when it comes to the relationship between dividend policy and performance. The objective of this study was to establish the effect of dividend policy on financial performance of companies quoted at Nairobi Securities Exchange. This study relied on secondary data. The study sampled 30 companies listed at the NSE. Regression analysis was used to analyze the data and find out the effect of dividend policy on financial performance. The study found out that there is a significant positive relationship between dividend per share and returns on equity and dividend pay-out ratio also indicated a positive relationship with returns on equity on overall performance while the results on individual companies did not give the same response as some had inverse relationship depending on the industry under review. The study concludes by indicating that there is a significant relationship between dividend pay-out ratio and dividend per share with the returns on equity. The results of the study findings further indicate that the relationship is not only significant but also direct. Based on these results, the study recommends that organizations should rather declare constant dividend paid to shareholders rather than giving a decrease on the paid dividends since this will negatively affect dividend pay-out rate for customers. Management of various companies should ensure that dividend per share declared is positive for the future earnings of their firms.