Dividend Income Stocks

Best Insurance Dividend Stocks to Buy In Nigeria Stock Market – Learn How To Pick Penny Stocks In Insurance Sector, Spot Promising Shares That Will Pay More Dividend.

Spotting a good dividend income stocks isn’t about the yield alone as some beginners had thought. Sure, I know dividend is the focus here and as such “high-yield” is one key metric to watch, but there are a number of checklists to consider before investing your money in such companies.

Today, I decided to screen NSE listed companies for dividend income stocks so that I would add more passive income assets to my longterm equities portfolio. After 3-4 hours of stock analysis and deep research, I discovered my next favourite dividend income stock is surprisingly in a sector I least expected, guess what? It is Custodian Investment PLC, formerly Custodian and Allied Insurance Plc.

As of this writing, the stock is selling for N5.18 and had increased by 33.16% and 43% on a YTD and 1 year respectively.

Why did I pick this insurance stock as my favourite dividend income stock? Let’s use the 6 criteria I shared on this blog to screen Custodian Investment Plc.

Dividend Yield

I had earlier stressed the key reason your search for dividend should start with yield. While it shouldn’t be too high to avoid buying stocks that are in trouble, just like Skye Bank, a lower yield below an acceptable level might mean that you are not buying at a cheap price. Your definition of cheap stock as an income investor isn’t the price you pay on nominal terms but the value you are expected to get after investing in your selected stocks.

This is why you should only buy a stock that offers a juicy dividend yield. An acceptable yield is one that is close to the CBN treasury and FGN bond of 10-12%, and I already said that a dividend stock that offers 8-10% isn’t bad.

As of this writing, Custodian Investment Plc stock sells for N5.18, the stock, after hitting a new high of N6.89, had been trending downward as investors negative sentiments on the NSE market persist.

Based on the current market price and the last dividend payout of 42k, Custodian Investment offers a yield of 8.1%.

Consistency of Dividend Payment

A great dividend rewards its shareholders, even though we might see some downtimes in the trend but the consistency of dividend payment is one pension fund managers and other institutional investors watch out.

An acceptable number of years a company must have covered in its dividend history is 7-10 years with little or no record of holding back. Custodian and Investment plc meets this standard.

In the last 5 years spanning from 2013 to 2017, the company had paid 16k, 18k,  20k, 25k, and 42k respectively.

Average Annual Dividend Growth

Consistency in dividend payment may not translate to increasing reward for shareholders. The growth trend also matters; a company might be consistent in paying a dividend but at a moderate level that isn’t attractive. To avoid de-marketing some listed stocks, I won’t mention a name here but I have seen a banking stock with falling dividend year on year for 5 consecutive periods now. Such stock, we would say, is consistent but not growing.

Growth is the only metric that would make a dividend stock more attractive to fixed income investors who want to divest from CBN Treasury or FGN bond.

From the dividend history of Custodian Investment plc, the stock has an average dividend growth of 25% which is clearly above the 10% threshold and ranks among the best in the industry.

Based on rule 72, Custodian dividend yield for shareholders who key in at the current market price could double in 3 years to 16.2%.

Dividend Payout

The biggest driver of dividend-paying stocks is the profit they make from ordinary business and increased profit comes from re-investment. Companies that don’t invest in growth might hit a roadblock and as such generate less distributable cash. This is the reason, I love stocks that pay less and re-invest more in future growth and expansion.

Custodian Investment has a historical average dividend payout of 29.25% which is less than my 40% threshold and still within an acceptable minimum level to entice shareholders who want to balance growth and cash reward.

Return on Equity Vs Debt

Custodian Investment plc has a 5-year average return on equity of 18.3% which is quite impressive. On a breakdown, the return on equity grew from 18% in 2014 to 20% in 2017 while Debt to Equity has been relatively stable at 1.2 in the last 5 years. The insurance firm has been utilizing shareholders’ fund to efficiently.

We understand that this is an insurance stock, policy liabilities is a key part of the business. This is tantamount to deposit liabilities in the banking sector.

Custodian Investment passed!

Average Free Cash Flow Growth

In as much as the dividend is driven by profit, it is paid from actual cash flow. This is the reason, you must always look at the trend of cash generated from the operation, it is only a company that has enough cash in the bank, that pays a dividend.

At the “cash generated from operation” section of the statement of cash flow as culled from investing.com, Custodian Investment plc reported a cash of N2.7b, N8.4bn, N6.8bn and N4.1bn from 2014 to 2017, invested N301m, N224m, N326m, and N439m on capital projects in the same period which leaves us with a free cash flow of N2.3, N8.17b, N6.47, and N3.66 respectively. This represents a 5-year average cash growth of 19%.

The company has enough cash to sustain dividend payment.

The trend of cash flow indicative of the fact that the company is investing in future growth, no wonder the management opted for the change of name, from Custodian and Allied Insurance to Custodian Investment Plc to reflect the next phase of growth.

In summary, Custodian Investment passed my 6 checklists! It’s a buy for longterm from my end.

Best Dividend Paying Stocks To Buy In Nigeria Stock Market – Learn How To Buy Shares In Companies That Pay High Dividend Yield Every Year.

A lot of investors overlook the power of dividend. In fact, since 1990, dividend has generated half of the stock market investing profits in the stock market. Further, dividend stocks offer investors consistent income and are often a hedge against share price fall.

Benchmark

Not every company that pays dividend actually qualifies as a good dividend income stock, so it’s better for an investor to know when he is better off investing in “Treasury Bills, FGN Bonds,” or keeping their cash in “Fixed Deposit”

As of this writing, CBN Treasury bills pay between 11-12% per annum while 5-10 year FGB bonds hover around 15%.

With such juicy and risk-free return on your investment payable semi-annually, why then should one consider a dividend stock?

The reason isn’t unconnected to the fact that returns from Treasury bills and FGB bonds are subject to interest rate risk, and as inflation inches upward, your return doesn’t increase; it is fixed throughout the tenor and might even reduce in value as real return turns negative. Negative real return arises when the inflation rate increases faster than your return on investment.

This is the reason, smarter investors don’t buy a stock because it pays dividend consistently but that the return as measured by dividend yield is close to the average yield on Treasury or FGB Bonds and likely double in 5 years or less. A dividend yield is calculated by dividing the dividend per share by share price. It is a measure of the percentage of cash paid to shareholders based on the amount invested.

Let’s take UBA as a perfect example of how dividend income stock can generate an above-average return on your investment if you had bought the stock for N4 in 2014 when it paid 10k per share.

The yield as of then was 2.5% while 10-year FGN bond in the period was 11.89% to 12.09%. (Source: Proshare)

FGN bond as that period paid more and seems attractive compared to UBA stock.

But now, equity investors in UBA now enjoy a better return of 21.25% today and sells for N8 per share (85k per share dividend divided by N4 paid on purchase in 2014), an impressive long-term return that beats the same FGB bond of 12%.

The big question, how can one scoop up dividend stocks that also have an upside potential? Yes! I mentioned share appreciation because, a company that rewards its shareholders year on year will, no doubt, attract more investors who place a premium on the value and as such, see its share price increases on accumulation.

Here are my 6 checklists to spot great dividend stock in the NSE market.

Dividend Yield

The dividend yield lets you measure the return expected when you buy at the current market price. It’s best benchmarked with CBN Treasury and FGB Bonds and should not be far less or more.

As of this writing, the FGN bond is 12%, so a modest dividend yield of 8-10% makes more sense. A dividend yield above 15% calls for further scrutiny as such tempting level could be a result of a massive sell-off since lower prices translate to higher yield, an investor should stick to a moderate yield of 8-10%.

Consistency of Dividend Payment.

Your preferred stock should be a dividend aristocrat; a stock that had been paying dividend consistently for 7-10 years. Dividend aristocrat is known for their consistency in dividend payment and such tends to be a safe haven for investors looking for retirement stocks.

Annual Dividend Per Share Growth of 10%.

This is a key metric to watch as it is the reason UBA stock yield, as shared earlier, jumped from 2.5% to 21.25% in 4-5 years. Based on the dividend history of the bank, it has an average annual growth of 15%. Using rule 72, a stock should have an average dividend growth rate of 14% to double its payout to shareholders in 5 years. For 20% growth rate, it will take 3-4 years.

When you have several dividend income stocks with high and low yields to choose from, use their average annual dividend per share growth to screen for the best. High yield doesn’t mean it is a great pick; you might end up having your cash payout reduced if it’s been stable or stagnant but a lower yield with above-average growth will reward you more in the future.

Dividend Payout.

The average payout shouldn’t be in excess to deter the company from re-investment. Smart investors know that growth comes from re-invested profit and as such should feel uncomfortable buying equities in a company that pays a higher portion of its profit back to shareholders except it’s a special dividend from income realized from one-off asset sale. The rule of thumb is to buy stock with dividend payout less than 40% of its earnings per share.

Return on Equity vs Debt to Equity.

A great dividend stock utilizes shareholders fund to generate more profit above industry average while reducing its interest expenses or lower exposure to high-interest debt. A higher cost of debt could affect profit after tax hence, reduce distributable and re-investible profits. The average return on equity of a good dividend stock in the last 7-10 years should be above 10% while debt to equity should be reducing or less than 1.

But, for businesses that generate deposit liabilities like Banks, focus on the cost of risks, capital adequacy ratio and Non-performing loan ratio.

On insurance stocks, focus on average claim ratio, expense ratio and combined ratio as a way to measure profitability.

Average Free Cash Flow Growth.

Dividend is paid from cash generated from operations, not from net profit. As a smart investor, you should focus on the free cash flow reported on the cash flow statement. To know what the free cash flow is, deduct capital expenditure from cash flow generated from operating activities.

Companies can manipulate their net earnings at the end of the year but cannot doctor their cash flow. Great dividend income stocks don’t just grow their net earnings but also generate enough cash to pay shareholders at the end of the year.

Based on these checklists, I will be sharing recommended dividend income stocks you can buy on this blog,

If you are looking for a banking stock to speculate on right now, Zenith bank isn’t one you should gamble on, rather key into the potential of the bank as a long-term investor.

As of this writing, Zenith Bank’s stock year to date return is -16.9% but the dividend yield of 12.3% is a return every smart stock market investor should quickly take advantage of right now.

The stock and UBA, are the only banking stocks with a double-digit yield above 10%.

While dividend yield only isn’t enough to ascertain the stability of a long-term dividend income stock, let’s look at the dividend history of Zenith bank.

Zenith, at a closing price of ₦21.5 and projected final dividend of ₦3, offers attractive dividend yield (13.9%) that clearly beats fixed deposit, treasury bills and long-term bonds.

Based on the dividend history of Zenith, ₦1.75 in 2014, ₦1.8 in 2015, ₦2.02 in 2016, ₦2.7 in 2017 and an interim cash pay out of ₦0.3k in 2018, it has an average annual dividend per share growth of 15%. In 5 years, shareholders of the bank may see their pay out jump from 13.9% to 27.9% (expected pay out of ₦6 in 2023 per share divided by the purchase price of ₦21.5)

In the last one month, the bank’s stock is up by 2.35% as investors looking for long-term stocks with attractive yield accumulates above average units of bank shares at an undervalued price.

Recent Result

Results for the half year ended June 2018 show that interest income fell by 12.8%, from ₦262 billion in 2017 to ₦228 billion in 2018 while interest expenses fell to ₦74billion (from ₦123billion) as the bank lowered its interest rate on fixed deposit to save cost. Overall, the bank’s customer deposit from ₦3.4 trillion to ₦3.1 trillion.

Profit before tax jumped from ₦92 billion in 2017 to ₦107.3 billion in 2018. Profit after tax rose marginally; from ₦75.3billion in 2017 to ₦81.7 billion in 2018.

The bank’s financial performance was largely boosted by the significant drop in impairment loss on financial assets to ₦9.7 billion (from ₦42.3 billion in previous comparable period). Thanks to the increasing oil price (above $65/barrerl) which is expected to lower oil and gas loan risk and boost asset quality.

The growing adoption of mobile banking is also expected to support non-interest income in the future.

Technical Analysis

Technically, Zenith bank stock price is below its 20-day price of ₦23 and 50-day moving average price of ₦26.3 which suggest that investors had been selling the stock due to general market sentiments.  But, as the stock found support at the same level with the stock’s 200-day-moving-average of ₦19.33, and as of this writing sells for ₦21.5, we believe long-term investors are now taking advantage of the attractive dividend yield opportunity since it’s a dividend income stock.

Valuation

Zenith bank reported a 2018 half year EPS of ₦2.60, which is 8% growth over the EPS of ₦2.4k in the comparable period (2017).

Using a discount rate of 14%, a modest declined full-year EPS (on the expected reduction in interest income due to lower yields on fixed income securities) of ₦5.2, we assign a fair value of ₦37 to the stock, which is 72% above the current share price.

Market update

S&P Global Ratings affirmed its ‘B’ long-term and ‘B’ short-term issuer credit ratings on Nigeria-based Zenith Bank PLC (Zenith). The outlook is stable. At the same time, the rating agency affirmed its national scale ratings on the bank at ‘ngA/ngA-1’.

The affirmation reflects the view that Zenith will continue to display better asset quality indicators than its domestic peers and sound revenue generation over the next 12-18 months despite the generally slow economic recovery in Nigeria. (source: Proshareng)

Recommendation

We assign a BUY rating on Zenith bank for long-term investors.

About Zenith Bank Plc

Zenith Bank PLC is a commercial bank with offices located in several parts of Nigeria. The Bank provides services to corporate, commercial and individual customers.

This dividend income section of my blog is focused on selected stocks that offer a double-digit dividend yield and have rewarded shareholders handsomely in the last 4 – 5 years and may still increase dividend per share in years to come.

Why you should add UBA to your dividend income portfolio now.

If you had bought UBA around ₦4 – ₦5 per share, your dividend income as a long-term investor would be a paltry 2.5% of your investment in the year of purchase. Did you also know that the same dividend income now pays some of the bank’s shareholders a whopping 21.25% today? A return that clearly beats Treasury Bill, Bond and Bank Fixed Deposit.

UBA is one of the banks that had, not only be paying dividend consistently but also grew per share payout from 10k in 2014, 60k in 2015, 75k to 2016 to 85k in 2017 and 20k per share in the first half of 2018.

This is how dividend investing makes one a millionaire which is the key reason I decided to add “dividend income stock recommendation” to this blog.  The idea is to look for dividend income stocks with yields in the double-digit range.

See – How I pick good dividend income stocks

Let’s review the recent performance of UBA:

As of this writing, UBA’s stock year to date return is -21.36%. The stock, from dividend income perspective and at a market price of ₦8.1, currently offers double-digit yield above 10% and is poised to double in 4 – 5 years if it maintains the annual dividend per share growth.

In the last one month, the bank’s stock is up by 1.25% as investors looking for long-term stocks with attractive yield pile up more units of bank shares at an undervalued price of ₦8.

Recent Result

Results for the half year ended June 2018 show that interest income grew from ₦154 billion in 2017 to ₦187 billion in 2018 while interest expenses increased to ₦76billion (from ₦53billion) as the bank looks to attract fixed deposit customers. Overall, the bank’s customer deposit increased from ₦2.7 trillion to ₦2.9 trillion.

Profit before tax jumped from ₦57.5billion in 2017 to ₦58 billion in 2018. Profit after tax rose marginally; from ₦42.3billion in 2017 to ₦43.7 billion in 2018. From the result, UBA showed improved performance despite the drop in yield on fixed income instruments, thanks to its Africa-focused strategy.

Technical Analysis

Technically, UBA stock price is below its 20-day price of ₦10.49 and 50-day moving average price of ₦9.5 which suggest that investors had been selling the stock due to general market sentiments. Long term investors might have renewed their buying interest as the price had just found a strong support at ₦7, the same level with its 200-day moving average of ₦6.3

Fundamentally, this isn’t unconnected to the attractive dividend yield opportunity since it’s a dividend income stock.

Valuation

UBA reported a 2018 half year EPS of ₦1.23, which is 1.6% growth over the EPS of ₦1.21k in the comparable period (2017). Using a discount rate of 14%, an assumed zero growth full year EPS of ₦2.2, we assign a fair value of ₦15 to the stock, which is 87% above the current share price.

Market update

No recent news.

Recommendation

We assign a BUY rating on UBA for long term investors.

About UBA

United Bank for Africa (UBA) Plc is a financial services group in sub-Saharan Africa with presence in Africa, the United Kingdom, the United States, and France. The Company is a financial institution offering a range of banking, pension fund custody and other financial services to customers in retail, commercial and and corporate segments of the African market.