July 16, 2021 | Ganesh Adhikari
Dividends are very important for investors since they can be a sound and dependable source of income. Dividends are simply the distributed profits/earnings of publicly-listed companies to the investors or traders who hold their stocks at the time of book closure. The dividend has a direct effect on the price of a stock, thus a company with a high dividend-paying history or future potential of high dividend will cause the stock price to sore upwards.
So what makes a company pay standout dividends to its investor? It’s a common question that arises in every new investor’s mind.
You May Also Like:
Let’s see some of the major factors that influence the company’s dividend decision and eventually identifying the companies with the potential to pay high dividends.
Major Factors Affecting Company’s Dividend Payout
1. Company’s Profitability
The prime factor is the company’s profitability when it comes to dividend distribution and stock price. If the annual returns look good, one can expect the dividends for his investments. Whereas, if the company’s finances look struggling it is not possible for a high dividend.
2. Reserves and Surplus
Reserves and surplus dictate the liquidity of the company. The healthier the reserves account, the better the cash flow encouraging the company for better dividend pay.
On the contrary, the company with low reserves is bound to propose less dividends if any. Even if the company might have performed well in the annual report but if it lacks reserves, it might not pay as handsome dividends as one would expect. Nonetheless, those companies have excellent potential for future dividends. Thus, you can see their PE ratio high even with no dividend history.
Most of the life insurance, non-life insurance companies, and hydropower companies in NEPSE tend to show such behavior.
3. Stable Earnings
The company which has performed well in business with time is expected to pay handsome dividends to its shareholders. The well-established companies have stable and ever-flowing sources of earnings while the newly established ones with less market might not look so promising to deliver the desired dividends.
If the companies seek expansion in business, they need more capital and thus tend to pay higher bonus dividends. If the companies are already well-established and have no potential for further expansion, distributing high cash dividends might be their aim. Nepal Doorsanchar Company Limited (NTC) is already a well-established company in Nepal, thus it focuses on cash distribution rather than bonuses. Microfinance companies of Nepal that need cash flow and have high growth potential pay handy bonus dividends. Similarly, the insurance companies have high growth scope in Nepal.
Another factor that has a direct consequence on the dividend payment is the existing debt of the company. If a company is obliged to heavy debt the company is in no position to distribute high dividends. The company’s earnings will be used to pay the debt. On the other hand, companies that do not have debt tend to pay high dividends.
Most of the hydropower companies listed in NEPSE are carry high debt. Thus, even if they start electricity production they might not be able to distribute high dividends straightaway. Hence, investors need to be careful and do thorough research before investing in such stocks.
6. Dividend History
It is no wonder that those companies which had paid good dividends in the past are expected to follow the same path in the future. So, a lazy way to predict the future dividend would be to have a look at its history. But history alone might not be sufficient to get the desired return on your investment. Looking at the current financial position of the company is equally important.
Some of the highest dividend-paying companies in Nepal are Unilever Nepal ( UNL), Himalayan Distillery (HDL), Bottlers’ Nepal Terai (BNT), Nepal Telecom (NTC) etc.
To quote famed economist Eugene Fama, “Your money is like a bar of soap – the more you handle it, the less you’ll have.” Thus, one must let the compounding do its work and try to reap the rewards of the dividends.
(Liked this article??? If you are also interested in publishing your articles related to business, finance, and economics, then mail us your article at Investopaper@gmail.com.)