The study examined the relationship between dividend policy and financial performance of selected deposit money banks in Nigeria within a five-year period ranging between 2015 and 2019. It was established that dividend policy is the decision of the firm regarding the proportion of earnings that should be paid as dividends and the proportion that should be retained for growth and expansion purpose. The development of dividend policy is determined by several factors including investment opportunities available to the firm, earnings performance, general economic and financial conditions, shareholders expectations and stability of earnings among others.

This study adopted descriptive research design. Data on the variables of interest was sourced via the annual financial statements of selected banks posted on website of the Nigerian Stock Exchange. The study employed the panel regression modelling to estimate the impact of financial performance on dividend pay-out of selected banks to accommodate bank-specific differences. The results of the Hausman test showed that random-effect is more appropriate to estimate the coefficient of parameter estimates in the model. The study measured dividend policy by dividend pay-out ratio while financial performance was gauged by return on equity. Dividend pay-out ratio was modelled against return on equity alongside with total debt ratio and bank size (proxy by natural logarithm of total assets).

The results revealed that; financial performance (return on equity) positively but insignificantly impacted dividend pay-out of selected banks within the review period.

The study concluded that improvement in the level of profitability encouraged the board of directors of selected banks to declare higher dividends under period of review, but profitability was not a major determinant that shaped their decision on dividend payment during the reviewed period. The study further recommended that; selected banks should maintain a stable dividend pay-out to enhance internal finance performance, market valuation and wealth maximization of shareholders; It is imperative for Nigerian banks to always find ways of increasing the percentage of distributable earnings being paid to ordinary shareholders in form of dividends as well as finding means of boosting their capital base to enhance and improve post-tax profit of banks; Banks are advised to appropriately funds available to them and manage it in a such way that more profit can be generated from it which in turn will lead to increase in shareholders’ wealth maximization; Adequate monitoring and supervision should be embarked upon by the firm to ensure prudency and proper accountability.




1.1  Background to the Study

Dividend policy is one of the most controversial issues in modern corporate finance. Despite years of investigations, financial scholars have not yet reached a clear answer to the question of whether dividend payments have any connection to a firm’s value. Fischer Black (1976) says that “the harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just don’t fit together”. This mystery led to the emergence of a handful of competing theoretical and empirical research to explain why companies pay or do not pay dividends. After decades of non-stop research, dividend policy is still listed as one of the top ten crucial unresolved issues in the world of finance in which no consensus has been reached (Brealey and Myers, 2003).  Dividend represents a distribution of earnings to the shareholders of a company. Dividend or profit allocation decision is one of the four decision areas in finance. The other three are financing, investment, and working capital management decisions.  As noted by Ross et al. (2002) companies view the dividend decision as quite important because it determines what funds flow to investors and what funds are retained by the firm for investment.

The term Dividend is known as the return distributed by the firm, in terms of cash, shares and other form of the earning to its shareholders for their investment in share capital. It is the means by which cash comes out of the company and goes to shareholders in the capital market. For any investors who invest their money in securities of any companies, the return would be dividend earning or the appreciation in value of shares through capital gain. Hence, in the capital market, one of the important financial decisions is the allocation of earnings into two sections i.e. dividend and/or retained earnings. For this, each firm should accurately decide about the amount of dividends which should be distributed among stockholders and the amount of earnings to be retained in the organization. This scenario of deciding about the rate of dividend or retained earning constitutes the basic concept of dividend policy.

Dividend policy, thus, refers to management’s long-term decision on how to deploy cash flows from business activities, that is, how much to invest in the business, and how much to return to shareholders. As per Irandoost (2013), the primary objective of financial management of firms, i.e. the wealth maximization of stockholders, the decision towards the allocation of firms earning should be ultimately to increase the shareholders wealth. Every firm operating in a given industry follows some sort of dividend payment pattern or dividend policy which is obviously a financial indicator of the firm. Thus, demand of the firm’s share price should be to some extent, dependent on the firm´s dividend policy (Masum (2014). A group of researchers view dividend policy as irrelevance which means dividend policy has no effect on either the stock price or its cost of capital e.g. Miller and Modigliani (1961), Baker et al. (1985). Another group of researchers argue that dividend payment carry special information leading towards a rise in share price e.g. Walter (1956), Gordon (1963). The last group of researchers argues that dividend payments lead to decrease the stock price, and hence decreasing the value of firm e.g. Pettit (1972). Dividend policy can also provide information to stakeholders concerning the company’s performance. According to Swee et al. (2007), the investments made by a firm determine the future earnings and future   potential dividends; and dividend policy influences the cost of capital in making these interrelated decisions, the goal is to maximize shareholders wealth. Ibenta (2005) asserted that equity capital entitles shareholders to dividend payment. The financial management has the responsibility of ensuring equity and fairness in apportionment of any benefit to the various shareholders. Dividend decision entitles striking a balance between future growth of the firm and payment of current dividend to firm’s shareholders. The ability of a bank to pay dividends will depend to a large extent on its financial performance.

The decision of the firm regarding how much earnings could be paid out as dividend and how much could be retained by the firm is the concern of dividend policy. It determines what proportion of earnings is paid out to shareholders by way of dividends and what proportion is retained back in the firm itself for reinvestment purposes. The development of such a policy will be greatly influenced by investment opportunities available to the firm and the value of dividends as against capital gains to the shareholders. Firms can retain its free cash flow, either by investing or accumulating it, or paying it out through a dividend or share repurchase. The level of equity retained in the company is affected by the amount of earnings paid out to shareholders, financial managers need to make this decision with caution as it is one the critical decisions in financial management. Dividend policy has remained one of the most controversial issues in corporate finance since the introduction of Irrelevance of Dividend Policy Theory by Modigliani and Miller (MM) in the 1960s when they believed in the world of efficient market where dividend policy does not affect the shareholder’s wealth. Over the years, series of academic research has been carried out on firms’ dividend policy and these have led to a number of competing theoretical explanations for dividend policy.

Since the economic development of a nation is dependent entirely on its banking system, the performances of these banks need to be considered regarding the adoption of dividend policy. This research seeks to find out if dividend policy of these banks can reflect on their performance, to be more explicit, its market performance and examine variables that could have effect on it.



1.2  Statement of the Problem

Coming up with a dividend policy is difficult for the directors and financial manager of a company, because different investors have different views on present cash dividends and future capital gains. One more confusion that sets in is regarding the extent of influence of dividends on the share price. The dividend policy that a firm approves is a complex and a critical issue in corporate finance, therefore, management are in a difficulty about whether to pay large, small or zero percentage of their earnings as dividends or to keep them for future investments, this has come about as a result of the need for management to satisfy the numerous needs of shareholders (Mohammed 2007).

The amount of dividends distributed by a company can influence stock prices because investors prefer returns coming from dividends compared with capital gains or in other words, investors prefer profits in dividends than expected gains from capital appreciation. Bird in the hand theory developed by Myron Gordon and John Lintner proposes that a relationship exists between firm value and dividend payout. It states that a naira of dividends in the hand is less risky than a naira of potential future capital gain in the bush (Ade 2006) which means that firms with high payout ratio would have higher values than firms with low payout ratio. This maintains the fact that shareholders prefer high dividends because it has a high certainty than capital gains (Hermuningsih & Wardani, 2009: 415).  The higher dividend payout ratio will be more beneficial to shareholders because of the greater level of return on shares held (Darsono, 2009: 58). In the capital market activity, investors have expectations of its investments, namely in the form of capital gains and dividends (Marlina & Danica, 2009). The shareholders who do not like risk would prefer to receive dividends rather than capital gains. Dividends that exist today have a higher value than the capital gain that will be received in the future. This is in accordance with the bird in the hand theory. Thus shareholders who fear the risk would be better liked receive dividends rather than capital gains (Gordon, 1962; Linter, 1962).

some studies examined the factors that determine the dividend pay-out ratio, some examined the impact of dividend policy on the profitability while some examined the relationship between dividend policies and financial performance and some studies examined the impact of the recent financial crisis on firm’s dividend pay-out. However, some of the studies [for instance Yusof and Ismail (2016) Pandey and Ashvini (2016) Khan, et al, (2016) Kuzucu (2016) Echchabi and Azouzi (2016) Mui, et al (2016), Mahdzan, et al (2016)] were carried out in foreign countries. In view of this, the study tends to fill this gap by examining the dividend policy and financial performance of money deposit banks in Ogun state of Nigeria.

Different research has been done on the relationship between dividend policy and the effects it has on a firm’s performance taking developed economies into consideration, thus this study would like to look into their research to check if it would correspond with developing economies. This research would like check if the dividend payout policy would have effects on a firm’s performance taking Nigerian banks into consideration, since Nigerian banks  operates in a developing economy and the economy of the nation is determined by it and to also give room for further advice.

1.3  Objectives of the Study

The broad objective of this research is to explore the impact of dividend policy and financial performance on money deposit banks in Nigeria. Specific objectives are to;

  1. analyze the determinants of dividend policy in money deposit banks in Nigeria;
  2. examine the effect of profitability on dividend policy of money deposit banks in Nigeria; and
  3. determine the relationship between dividend policy and the financial performance of money deposit banks in Nigeria.


1.4  Research Questions

The following are the research questions;

  1. What are the determinants of dividend policy in money deposit banks?
  2.  What is the effect of profitability on the dividend policy of money deposit banks?
  3. Is there any significant relationship between dividend policy and the financial performance of money deposit banks?

1.5. Research Hypothesis

This study is guided by the following hypothesis:

H01: There is no significant relationship between dividend policy and the financial performance of money deposit banks.


1.6. Significance of the Study

The role of dividends has motivated many areas in which research have been done. This study however focuses on examining the relationship between dividend policy and the positive or negative response they trigger on the enterprise in terms of financial performance. This study intends to serve as a framework for assessing and utilizing dividend policy mechanisms and its components in enhancing profitability levels in banks. It will also be of benefit to those in the financial sector by enlightening them on steps taken to improve on its dividend policy; it will be very useful to the management of these companies who will formulate appropriate policies on how to pay its various shareholders.

Finally, the study will add to the existing literature on the subject matter of dividend policy and also compliment the work of other authors.

1.7. Scope of the Study

This study is aimed towards establishing the relationship that exists between dividend policy and financial performance of the money deposit banks. Ten banks in Nigeria were taken into consideration. The choice of the ten banks is based on the ability to obtain comprehensive and complete data that will be used for this research work.

1.8. Definition of terms

Dividend: That portion of retained earnings that is paid to shareholders. It is a reward for investing in shares. It is distributed either in form of cash or stock to the shareholders of a company.

Dividend policy: A company policy on decision on the retention of profit and distribution of profit as dividend. Several factors are considered between retention of profit and distribution of profit as dividends. Examples are legal consideration, dividend policy of other similar industries, and tax bracket of the shareholders e.t.c.

Wealth maximization: The concept that advocates that financial management must select those decisions which create most wealth for the owners. It is the maximization of the market value of shares.

Earnings per share: This is earning before extraordinary gains and losses, less preference-share dividends, divided by ordinary shares outstanding at the most recent year end.

Shareholders: They are equity holders in a company. They are the owners of the company.

Capital: Funds provided by members of the company subscribing for share and by loan capital raised by borrowing.

Dividend payout ratio: This ratio shows what percentage of the company’s distributable earnings is being paid to the ordinary shareholders in the form of dividend.

Profitability: A term that describes a company’s strengths in terms of possessing ability to earn a return on its invested capital.

Financial statement: This refers to the formal record of financial events of a firm. They include balance sheet, income statement, retained earnings statement and cash flow statements. All these financial statements are a pre-requisite for financial reporting.

Performance: The way in which somebody does a job, judged by its effectiveness.

Adoption: To take and follow (e.g. a course of action) by choice or assent. It is an act of using an idea or a plan for one’s use.

Cash flow: Shows the actual inflow and outflow of cash during a given time period.

Stock Exchange Market: This is an organized and regulated financial market where securities (bonds, notes, shares) are bought and sold at prices governed by the forces of demand and it is often measured by price to earnings supply.