Highest Dividend Paying Stocks In Nigeria – Profitable Strategies To Pick & Buy The Best Nigerian Stocks For LongTerm Investments
I hope you enjoyed the detailed analysis I shared on how to pick the best banking stocks for a better portfolio performance? As of now, that investment strategy is the longest article on my blog, so don’t read it as a poem but understand how I reviewed Zenith bank’s stocks with a modest estimated value that revealed a 15% upside potential from now till March 2018.
As a continuation to the discussion I had with my friends on bank’s stock, another good guy asked, do you plan to invest for just price appreciation, or how can one find the best dividend paying stocks in Nigeria stock market? Well, that was another interesting question because a lot of stock market traders don’t have a clear idea of the opportunities in the market, they just want to enjoy price appreciation, and miss out on the residual income from dividend payouts to shareholders. I know a friend who had invested a huge sum into five (5) stable sectors stocks last year and is already expecting his first five (5) figure income this year, besides his portfolio is up by 27% as more institutional investors position themselves ahead of the full year audited report, 2017.
This post focuses on how we jointly picked the best highest dividend paying stocks in Nigeria stock market using a simple method I will be sharing right now:
Check the overall economic indicator – let Oil price guide you.
Anytime I look for stocks to pick, the first step I don’t skip is to ascertain the general economic environment using global Oil price trend. This post on how to find the best sector stocks to invest in explains everything you need to know about the effect of oil price on the Nigerian economy and opportunities in different sectors.
In summary, I said that an uptick in the price of oil helps the government generate more petrodollars which reduce overall economic risk, so expect more fund to be channelled to key sectors like industrial sector as infrastructural projects are re-visited or more capital projects embarked upon, while reserve is also boosted to help cushion the effect of exchange rate.
As at when I shared this post, the banking, industrial and consumer sector have the highest share of investors’ confidence, as reflected in their year to date performance. This is not unconnected to the impressive growth recorded last year (2017), following the relatively stable exchange rate and increased market participation at investors and export window. Understanding top sectors let you focus on companies that will do well from government policies driving that sector. I also share how the government’s planned budget for the rehabilitation and construction of roads are expected to improve the cash flow of major building materials firm.
The banking sector is also expected to enjoy improved net interest income from loan and advances to oil sectors. You can read the post here
Find stocks in top sectors with highest dividend yield.
You are reading this guide because you want to learn how to pick the highest paying dividend stocks in Nigeria to buy, so it’s wise to first screen for the list of stocks that pay most in terms of dividend compared to what you pay per share.
Here is a list of stocks with highest dividend yield ranging from 6% upward as 12th, Feb. 2018.
From the list presented, you will see that tier two banks have the highest dividend yield with Skye Bank and FCMB sitting on 11.36% and 9.35% respectively. Ordinarily, you would have expected me to say, these two banks are the best dividend stocks to buy, but, this isn’t how smart institutional investors pick dividend stocks, they don’t settle for the highest yield but focus on profitable stocks that have been paying and will likely sustain their dividend payout by analyzing the financials of each of these listed companies.
Fundamental analysis of each of these stocks
The fundamental analysis of a dividend stock focus on evaluating the ability of a company to grow its sales, profit margin, lower its debt and improve cash flow, out of which dividend is paid out.
Using UBA financials, we will be looking at three simple questions to picking one of the profitable and highest paying dividend stocks in Nigeria stock market.
Are profit, margin and cash flow all increasing?
Here we want to be sure that gross earnings, profit margin, and cash flow is growing significantly compared to previous years. Let’s look at the profit or loss report of UBA for the purpose of this analysis:
UBA reported a gross earning of N333b in the 9 month period ended Sept 2017 against N265b in 2016, representing an impressive 25% increase. Besides, the company has maintained steady growth in earnings for at least 4-5 years, a result that is driven by its diversified earnings from different countries and growing e-banking channels across the border.
The profit after tax in the same period grew by 23%, from N49.5b in 2017 to N60.9 billion in 2016. But profit alone doesn’t prove that a company is doing well as there could be manipulation of figures, so here is what you should do: refer to the cash flow statement and check how the company is generating cash from operating activities and compare the growth in cash with profit. I like to see companies grow their free cash flow faster than profit after tax.
Is share price growing in line with earnings per share?
This is another critical question you need to investigate in your selected dividend stock. You might say, but I am only buying to earn dividend income, I am not concerned about share price. The truth is everyone loves to see their portfolio value increase while they expect the bumper dividend income every quarter or annually. A great company attracts more institutional investors who are looking for profitable and high paying dividend income opportunities which invariably should increase share price. But here is what you should look at: focus on dividend stocks whose earnings and dividend per share are increasing at least 25% and 10% in the last 3 years. The share price in the same period should be up by at least 50% to compensative for the patient of a long-term investor.
Is return on equity increasing while debt to equity declines?
The big mistake you can make as a dividend stock investor is to buy into a company that is highly levered; exposed to more debt and periodically pay interest. Ordinarily, when a company generates sales or earn money, they are expected to pay interest on a loan (finance cost) before distributing profit to shareholders. This means that as they increase their long-term loan, interest expenses follows which will drive profit after tax lower.
Shareholders, on the other hand, are happy when they see a high profit on equity investment as it is the only evidence that their funds are being utilized well. This is reflected on the return on equity figures.
A good dividend stock has its debt to equity under control or below a certain level while return on equity is on the increase in a similar period. This is a clear sign that the company will continue to pay a dividend in the nearest future.
For banks, you should replace the debt to equity with the cost of risk in the last 3-5 years; what percentage of the loan and advances is written off as an impairment charge.
Are dividend per share growing year on year?
Looking for a good dividend stock to buy isn’t all about the amount paid out per share held but how the company has been paying out an incremental portion of its earnings to shareholders. I love stocks that do not just have a high dividend yield but shows a consistent growth trajectory in the last 5-10 years.
In 2017, here are stocks that doubled their dividend payout to shareholders:
- Okomu Oil – N0.1 to N1.5, 1400% dividend growth
- AXA Mansard Plc – 2k to 5k, 150%
- Beta Glass – 40k to 98k , 145%
- Dangote Sugar Refinery – 50k to N1.1, 120%
This doesn’t mean, you should start looking for stocks that will double that payout but if you take a closer look at these stocks they met the criteria listed above.
It is now time to look at stocks that meet all the criteria mentioned earlier and starting to position yourself for a passive income from dividend payout in the next 5-10 years.