Elsewhere dividends are a welcome bonus. In Nepal they are the entire thesis. While the rest of the investing world debates growth versus value, Nepali investors appear to have made up their minds: they like their returns old-school, measured in hard rupees. Lofty projections be damned.
A 2019 study by Rabindra Joshi, an academic at Tribhuvan University, confirms what many brokers on the Nepal Stock Exchange (NEPSE) have always intuited. Drawing on audited financials from 163 listed firms (117 banks, 46 from other sectors), Mr Joshi finds dividends per share (DPS) are the most powerful predictor of a firm’s market price. Reinvested earnings, by contrast, barely move the needle. This may sound banal in theory but is surprisingly telling in practice. In a market governed by rumour and dominated by banks, the findings suggest cash in hand still trumps promises on paper.
Mr Joshi’s methodology is reassuringly sober. He runs three regression models, each more elaborate than the last, testing the effects of dividends, retained earnings, lagged price-to-earnings (P/E) ratios and past market prices. In every case dividends emerge as the standout factor. The headline result is provocative: for every additional rupee paid out as dividend, the share price jumps by NPR 12.5 on average—NPR 22.7 in banks, NPR 9.2 in non-banking firms. Retained earnings, though positively correlated with price, have a far weaker effect, roughly NPR 3.0 per rupee.
The disparity is telling. Banks, which dominate both listings via market cap and investor attention, are not only more profitable but also more generous with payouts. Their shares behave like income stocks, prized less for future expansion than for steady cheques. This creates a curious dynamic: in a developing economy with enormous unmet investment needs, the stock market behaves as though growth were a luxury and dividends a necessity.
This is not only a Nepali quirk. The “dividend effect” is well established in global markets, where consistent payouts are commonly seen as a signal of financial strength and discipline as well as managerial restraint. Retained earnings, by contrast, are treated warily, particularly in markets where corporate governance is fishy. Shareholders have long memories of bosses who promised expansion and delivered vanity projects.
In Nepal those suspicions are heated. Financial disclosures remain inadequate; accounting standards uneven; corporate boards are not known for their independence. In such a context the preference for cash returns is emotional and rational. A dividend received cannot be reclassified, embezzled or misspent. It sits in your account, immune to the whims of an ambitious CEO or a sluggish bureaucracy.
Adding past market variables to the model reveals another quirk: stocks display big momentum. Last year’s share price is an even better predictor of this year’s than current earnings are. This suggests a market that is reactive and prone to trend-chasing. But even after accounting for this inertia, dividends remain the strongest fundamental variable. That is, even controlling for momentum and valuation, investors still place a premium on tangible returns.
This preference has policy implications. Firms eager to raise their stock price have a simple playbook: raise your payout ratio. But this comes with trade-offs. In an economy starved of productive investment, a culture of high dividends may stifle reinvestment. Younger firms with long-term potential but limited cash flow may struggle to attract capital. Over time the market risks becoming skewed towards low-growth incumbents with conservative balance sheets and high payouts.
For regulators and financial educators, the message is mixed. On the one hand dividend chasing is at least grounded in arithmetic. On the other it risks promoting short-termism. A sophisticated market should reward value creation: not only value extraction. Teaching investors to look beyond dividends—to cash flows, strategy, capital efficiency—remains a pain in the ass. But without that the equity market may remain shallow, dominated by banks and punctuated by bubbles.
There is, to be fair, a case for caution. In an economy where the formal savings rate is low and alternatives to equities are few, regular dividends provide stability. Property is illiquid; gold unproductive; and fixed deposits uninspiring. In that context shares that pay out handsomely give a rare combo of liquidity and return. The dividend preference, then, is cultural and structural.
Still, the broader trouble remains. If the capital market is to mature it must wean itself off this fixation with cash payouts. That means more robust disclosures, stronger institutions and a gradual shift in investor mindset—from seeking yield to evaluating risk—, among others. But for now the stock market will continue to function less as a vehicle for capital formation and more as a conduit for cash extraction.
As it stands, the NEPSE is a strange hybrid: a bourse in form, a savings account in function. Dividends are the only signal investors trust in a world full of noise. And in a political and economic environment where stability is scarce, perhaps that trust is not misplaced.
After all, in Nepal even governments don’t last as long as a well-paying stock. ■
