Investment education: How to recognize a company that gives dividends? Which indicators to watch?

Many investors in Nepal's stock market ask, "Which company gives how much dividend?" They start investing with the question. But to be a good investor, the question should be a bit broader: "Why can a company pay dividends? Is that dividend sustainable or a one-year show decision? Will giving bonus shares increase my real wealth or just increase the number of shares? Where does the ability to pay cash dividends come from?" Only by finding answers to these questions can dividends be properly understood.

Looking at the market structure of Nepal, banks, financial institutions and insurance groups are still a major part of the market. Banks, financial institutions and insurance sector also have the largest share in market capitalisation. This means that dividend-seeking investors must understand the sectorial reality, not just the buzz. Dividends are returns that a company gives to shareholders from profits. Mainly two types of dividends are more popular in Nepal: cash dividend and bonus share. Cash dividends bring money into the investor's account, while bonus shares increase the number of shares. But since the price will be adjusted after giving the bonus shares, it does not mean that the total assets of the investor will increase immediately. In a study of Tribhuvan University, it has been mentioned that both cash dividend and stock dividend, i.e. bonus shares, are prevalent in Nepal, and even if bonus shares increase the number of shares, it cannot be considered that the shareholder's wealth has increased by itself.

1) Dividend History: Has the company paid dividends repeatedly or not? To identify a dividend paying company, the first thing to do is look at its five to ten year dividend history. If a company pays a lot of dividend in one year and pays nothing in the next three years, then that company cannot be called a stable dividend company. A stable company may sometimes give more, sometimes less, but shows the ability to give consistent returns for many years. Such a history can be seen in banks, some insurance companies, some manufacturing companies and mature hydropower companies in Nepal, but not all companies should be measured on the same scale.

When looking at dividend history, don't get excited just by looking at percentages. If a company gives a 20 percent bonus, it may look good, but then if profits don't grow by the same ratio, earnings per share may fall the following year. Bonus shares increase the capital, so the company is under pressure to make more profit in the coming year. So "how much dividend?" Rather than "How many years did you give it? Why did you give it? Can you give it again or not?" The question is more useful.

2) Earnings per share  Earnings per share, or EPS, is the most basic indicator of dividend analysis. EPS shows how much profit a company has earned per share. For example, if a company has an EPS of Rs 30 and is looking to pay a dividend of 15 percent, at first sight it seems feasible. But if the EPS is Rs 8 and the company announces a 20 percent bonus, investors should be cautious. Many investors in the Nepalese market make their decision only by looking at the bonus percentage, but the bonus of a company with weak EPS can become a burden in the future. After the capital is increased, the same profit is divided into more shares in the next year, which can reduce the EPS. Hence EPS should be stable or increasing in a good dividend company. One should look at the trend of at least three years, not one year EPS.

3) Distributable profit: Not all profits can be distributed Profit appearing on a company's income statement and profit being distributed to shareholders are not the same thing. Especially in banks and financial institutions, regulatory regime, capital adequacy, bad loans, provisions, reserves and other limitations affect the dividend capacity. In the unified instructions of Nepal Rastra Bank, it is mentioned that the banks and financial institutions cannot declare or distribute cash dividends and bonus shares if they are unable to maintain the specified minimum capital.

Therefore, investors should not read only the news that "the company is profitable" and make a decision. Distributable profit, reserves, capital, regulatory limits and board of directors policy should also be looked at. This is even more important in the banking sector, as even if a bank makes good profits, dividends may be reduced if capital is under pressure. This is why sometimes the dividend is declared lower than what the market expects. 4) Dividend Payout Ratio: How much profit is the company distributing?

The dividend payout ratio is a measure of how much of the company's earnings are distributed in dividends. A company that distributes a small portion of profits and invests the rest in business expansion may be a company seeking long-term growth. But it is not unusual for a mature company to distribute a large portion in dividends. The problem occurs when a company tries to pay dividends that exceed its actual earnings. Many investors in Nepal are attracted only when they see high dividends. But higher dividends are not always better. Sometimes it can also be a sign that a company's growth opportunity is over. Sometimes it may come from a one-time windfall. So a payout ratio range of 30 to 60 percent is considered healthy for most companies, but that means different things by sector. Banks, insurance, manufacturing and hydropower should not be viewed by the same standard.

5) Cash flow: Real money should be seen, not paper profit A company needs actual cash capacity to pay dividends. Even if profit is shown in the income statement, if the cash flow is poor, the company cannot pay cash dividends in the long run. If the amount left to be raised from sales in a manufacturing company is high, there may be a shortage of cash even if there is a profit. Earnings may be stable at a hydropower company, but debt repayments, interest and maintenance costs can put pressure on cash flow.

Investors should look at operating cash flow in the statement of cash flows. If the cash flow from the company's core business is positive and stable, the dividend quality can be considered good. Dividends based solely on profits from selling assets, one-time income or accounting adjustments are not sustainable. Long-term investors ask, "Where did the profit come from?" That question should always be asked. 6) Debt and interest burden: Dividends of companies with high debt can be risky

If the company has a lot of debt, even if it is profitable, the dividend potential may be weak. Debt and interest costs can be high, especially in hydropower, hotels, cement and capital-intensive manufacturing sectors. As interest rates rise, the profitability of such a company decreases, and so does the dividend potential. Hydropower companies start earning once the project is operational, but debt repayment pressure can be heavy in the initial years. While investing in the hydropower sector, it should be seen whether the project is operational or under construction, what is the power sale agreement, what is the debt-equity ratio, whether the actual income is coming according to the production capacity. Although the number of hydropower companies is high in the latest market report, not all companies can pay regular dividends. Having high numbers and good dividend potential are two different things.

7) Reserves and Net worth: Internal strength of the company A company with strong reserves can maintain dividend capacity even in difficult years. If the net worth is more than 100 rupees per share and is gradually increasing, it indicates that the company has accumulated past profits. But we should also understand why the reserve has increased. Increased reserves from actual business profits are good, but reserves from revaluations, accounting adjustments or temporary income should be viewed with caution.

It may seem easy for a company with strong reserves to give bonus shares, but giving bonus means raising capital in the future. As the capital increases, the company should be able to increase the profit accordingly. So a good dividend company should look at reserves, net worth, EPS and potential for business expansion. 8) Price-earnings ratio: Even a good company can be a bad investment at a high price The PE ratio shows how many rupees investors are paying for one rupee of a company's earnings. Even if the company pays good dividends, if the share price is too expensive, the dividend yield may be low. For example, a company pays a dividend of Rs 20, but if the share price is Rs 2000, the cash return is only 1 percent. If the same dividend comes on a Rs 400 share, the returns are very attractive.

In the bull period in the market of Nepal, the value of a good company also increases a lot. Entering into the lure of dividends at such times can lead to capital losses. So dividend investors should look not only at the company, but also at the price. Buying a good company at the right price is the foundation of long-term success. 9) Dividend yield: How much is the yield compared to the share price? Dividend yield is the rate calculated by comparing the annual dividend to the current market price. For example, a share bought at Rs 500 gives a cash dividend of Rs 25 and the return is 5 percent. If the company has only given a bonus, it is better not to consider the bonus as actual cash return, as the value is adjusted after the bonus.

Investors in Nepal should compare dividend yield with bank term deposits, government bonds and market risk. Shares have downside risk, so it may not be wise to take too much risk for a 2 percent return. But even a company with a low dividend yield can do well in the long run if it has stable earnings, a strong business, fair value and growth potential. 10) Regional Comparison : Bank to Bank, Hydro to Hydro should be compared

A company should be compared to companies in its own sector when analyzing dividends. A bank's EPS, bad loans, capital and distributable profit are important. An insurance company should look at insurance fund, claim payout, solvency and underwriting profitability. In hydropower, generation, debt, power sale contracts and operating expenses are significant. A manufacturing company should look at brand, sales growth, margins, raw material costs and cash flow.

Commercial banks in Nepal have seen a trend of declaring dividends from the profits of the financial year 2081/82. Some banks have mixed both bonus and cash, such as Everest Bank giving 6% bonus and 14% cash for 20% return, NMB Bank reported 5% bonus for 10% return. This fact suggests that the banking sector will still be on the dividend investor's watch list, but not all banks are the same.

11) Book Close and General Meeting: Dividend may be missed without understanding the time Investors need to know the book close date to get dividend. Only investors who become shareholders before the date of closing the books of the company get the dividend. Many new investors buy shares late after hearing the dividend announcement, but the book is already closed. After that, there may be a situation where you will not get the dividend by buying shares whose price has been adjusted. Dividend declaration, book close, general meeting, regulatory approval and time of arrival of shares in demat account are all different stages. Bizmandu's statement of October 2082 states that 15 companies listed in NEPSE have declared dividends and some of them have already closed their books. Such news shows investors the importance of both time and process.

12) Fallacy of Bonus Shares: Increase in numbers is not increase in assets There is a lot of attraction towards bonus shares in Nepal. A 20 percent bonus on 100 shares is 120 shares, so many feel they are rich. But after price adjustment in the market, the total price may be the same immediately. The real gain is only when the company increases EPS, profit and cash flow even with increased capital. The answer to the question whether bonus shares are good or bad depends on the quality of the company. A company's bonus can be useful for expanding the business by raising capital, increasing profits and even paying cash dividends in the future. But a bonus given just to appease the market or raise capital can put pressure on prices by reducing EPS in the future.

13) Regulatory Risk : Special focus on banks, insurance and microfinance Dividends in a regulated sector are not determined solely by the will of the company. The rules of Nepal Rastra Bank in banking, Nepal Insurance Authority in insurance and Nepal Securities Board in securities market are effective. In the monetary policy of Nepal Rastra Bank, the issue of reviewing the cash or bonus dividend distribution limit of microfinance financial institutions has been mentioned. This shows that the dividend policy in the microfinance sector may be affected by regulatory changes.

Therefore, investing in microfinance, banks and insurance companies is risky to make decisions based on last year's dividend only. Regulatory capital, bad loans, credit expansion, interest rates, liquidity and policy changes are directly affected. Dividend investors should make it a habit to regularly read regulatory notices. 14) Quality of Management : Not only dividend but also reliability is required Whether the management of the company is transparent, disciplined and shareholder friendly is very important in dividend investing. Companies that publish financial statements on time, give clear annual reports, hold regular general meetings, and maintain good corporate governance reduce risk. If the management is weak, even if the profits are good, there is no guarantee that the investors will get a fair return.

In the Nepalese market, sometimes companies declare dividends, but the process is slow. Sometimes investors get confused for a long time due to rights issue, bonus, merger, regulatory approval and demat process. So the past behavior of the management should also be studied. A good dividend company is not just a profit maker, but a company that treats shareholders in a timely and transparent manner. 15) Market value and Margin of Safety : Arbitrary value should not be paid for dividends

The biggest mistake in dividend investing is buying a good company at any price. Dividend yields fall when share prices are too high, and when prices fall, years of dividends can be eaten up by capital losses. Therefore, dividend investors should maintain a margin of safety. If the company is good, but the price is too expensive, waiting is also an investment strategy. Nepal's market runs fast on sentiment. If a sector moves, even weak companies grow, and good companies also become expensive. In such a case, a fact-based investor makes a decision by combining PE, PBV, dividend yield, EPS growth, debt and cash flow. Dividend investing is a game of patience, not a game of noise.

16) Which sector is more suitable for dividends? In Nepal, mature commercial banks, some development banks, some insurance companies, some manufacturing and processing companies, telecommunications and old stable companies are considered suitable for dividend study. But opportunities vary by region. Capital and bad loans are big issues in banks. Regulatory capital and business growth should be seen in insurance. Brand and cash flow are important in a manufacturing company. In hydropower, project status, credit and power generation are decisive.

The number of hydropower companies has increased, but not all hydropower companies are dividend companies. Many companies may be new, debt-ridden or in the construction phase. A mature, operational, debt-reducing and regular cash-flow hydropower can only be strong from a dividend perspective. So not "Hydro ran", but "Which hydro is making real cash?" You should study that. 17) A simple checklist of good dividend companies A simple way to identify a good dividend company is to look at the five-year dividend history, three-year EPS trend, distributable profit, operating cash flow, debt position, reserves, valuation and management credibility. Among these, two or three indicators are not enough. The overall health of the company should be good.

Caution is needed if a company has consistently paid dividends, but the price is too expensive. If a company is cheap, but profits are declining, it is also risky. If a company has given a lot of bonuses, but the EPS is falling, that could be a future problem. A good dividend investment should have all three "quality, value and durability". 18) Key Resources Investors Should Read Dividend investors should read the company's annual report, quarterly financial statement, NEPSE notice, Nepal Securities Board's notice, Nepal Rastra Bank's instructions, insurance authority's instructions and company's general meeting notice. Market news is helpful, but the final decision should be based on official details. This resource is useful to understand the regulatory process as the Nepal Securities Board publishes details such as registration of bonus shares, approval of rights.

While looking at the list of proposed dividends, investors should distinguish between the financial year, book close, general meeting and approval conditions. Market information platforms such as ShareSamsaar and NepSeAlpha provide the proposed dividend details, but it is best to check the company's own information and regulatory information when making an investment decision. 19) Practical strategy of dividend investing Dividend investors should not put all their money in one company. Better to diversify into banks, insurance, manufacturing, mature hydropower and other stable businesses. But having too many companies weakens the study. 8 to 15 well-studied companies may be sufficient for most retail investors.

Timing of purchase is also important. After the dividend is declared, the market price may have already increased. Sometimes the opportunity comes when the price adjusts after the dividend. A long-term investor can adopt a strategy of accumulating good companies at reasonable prices throughout the year, not just during dividend season. If dividends are reinvested, the compounding effect is stronger over time.