The relationship between dividend growth and risk for companies listed at the NSE
This research goes further than simply investigating the relationship between dividend and stock return volatility. This is because the research was carried out to investigate how the growth in dividend affects risk on the stock market, in this case the Nairobi Stock Exchange. Specifically the research endeavored to find out whether there is a causal relationship between annual dividend growth rate and risk. The return values were calculated for every Wednesday in the period of study. The annual standard deviation of these values of return was then calculated to estimate the values of risk. Dividend growth values for each firm were then calculated by finding the rate of change from the dividend of one year for a company to the next. The values of risk and dividend growth per company were then paired on annual basis and a regression conducted to establishthe relationship. After analysis the research found evidence of the relationship between dividend growth and risk not being linear as indicated by low values of R2 and values of T and F Statistics that were less than critical. This study established that there is a weak negative relationship between risk and annual dividend growth as a majority of the companies analyzed recorded a negative coefficient of .the independent variable. This meant that when firms increase their dividend the prices of their shares not only increase but also stabilize, The stability reduces risk. On the contrary when firms reduce the rates at which their dividends grow (in effect sometimes reducing the dividend), the result is increased volatility in the market of its stocks. It was concluded from the results that the relationship between risk and dividend growth is not linear. This was based on the fact that the T-Values and F-values were less than critical values. Further the distribution of the variables was not normal, the explanation p,?wer of the dividend growth to the variation in risk was weak meaning either there is no relationship, or the relationship is non-linear. Within this context of there not being a linear relationship between risk and annual dividend growth evidence suggested that companies paying high levels of dividend annually had lower levels of risk while those that had low levels of dividend showed comparatively higher levels of risk.