Dividend Yield Deep Dive

Dividend Yield: Understanding Your Income Return

Dividend yield is the annual dividend income you receive for every shilling you invest in a stock. For income-focused investors on the NSE, it is one of the most important metrics to evaluate.

The Formula

Dividend Yield = Annual Dividend Per Share / Current Share Price x 100

If a company pays an annual dividend of KES 4 per share and the current share price is KES 80, the dividend yield is 5%. This means you earn 5% per year in dividend income alone, regardless of any share price movement.

High Yield vs Low Yield

• High yield (above 6%) — Attractive for income investors, but investigate why the yield is so high. It could be because the share price has fallen sharply (which increases the yield calculation) rather than because the company has increased its dividend.
• Moderate yield (3-6%) — Often the sweet spot. Many established NSE companies like BAT and Stanbic offer yields in this range while also providing potential for share price growth.
• Low yield (below 3%) — Common for growth companies that reinvest most profits into expansion rather than paying them out as dividends.

The Dividend Yield Trap

A very high dividend yield can be a trap. Here is why:

• A stock was trading at KES 100 and paying a KES 5 dividend (5% yield).
• Bad news causes the share price to drop to KES 50.
• The yield now looks like 10% (KES 5 / KES 50), which seems attractive.
• But the company may cut its dividend because of the problems that caused the price to fall.

Always ask: Is the dividend sustainable? A high yield means nothing if the company cannot maintain the payment.

Comparing Yields on the NSE

Compare dividend yields against:

• Other stocks in the same sector — Which bank offers the best yield?
• Treasury bill rates — If T-bills pay 10%, a stock yielding 4% needs to offer capital growth potential to justify the extra risk.
• Inflation — Your yield should ideally beat inflation to preserve purchasing power.