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Before recently, Apple Inc. did not give dividend to shareholders.

This makes me curious why people buy Apple Inc. stocks; while it might be due to the expectation of selling stocks at a higher price, this can only be possible if other people are thinking the same, thereby increasing demand. But the stocks themselves do not pay interests - so Apple's amazing revenue/profit records would not matter....

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They already explained you the reasons. Anyway as an investors I always prefer stocks that do pay dividends, the reason is they make me feel better even in bear markets, because they decrease in prices like all other stocks, but at least they still go on paying dividends, which is a small reward, certantly better than seeing the price going down and getting nothing of nothing. –  Marco Demaio Oct 16 '12 at 19:44
@MarcoDemaio, are you sure about that? Dividends are not a guarantee, if the company's profits drop during an economic downturn it is likely they will reduce the dividends paid out, or maybe even pay no dividends at all until profits start to increase again. –  Victor Oct 17 '12 at 6:23

5 Answers 5

Instead of giving part of their profits back as dividends, management puts it back into the company so the company can grow and produce higher profits. When these companies do well, there is high demand for them as in the long term higher profits equates to a higher share price.

So if a company invests in itself to grow its profits higher and higher, one of the main reasons investors will buy the shares, is in the expectation of future capital gains.

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"management puts it back into the company so the company can grow and produce higher profit" How does a company put money back into the company? Does the company simply buy back it's own shares and thus create demand? When a "management puts it back intot eh company so the company can grow and produce higher profits", doesn't that mean the company is keeping the profits to themselves? I don't see how keeping profits in the company = more capital gains for the investors. It makes sense to some degree but there's a missing link that im not understanding. –  burnt1ce Nov 12 '13 at 3:05
@burnt1ce - instead of paying profits as dividends many companies use the profits or at least part of the profits to grow the business by spending on research and development or on new technologies to increase productivity, or to expand the business by buying out other businesses. These are just a few of the things a company can use its profits for to grow, instead of distributing them to shareholders. –  Victor Nov 12 '13 at 4:32
That's the general answer I keep getting but there's still a missing link. How does an increase in profits directly/indirectly increase the price of stocks? Profits and stocks are two completely different things! –  burnt1ce Nov 13 '13 at 21:15
@burnt1ce - would you rather own a business that is making profits or one that is not making profits? A company that makes profits and increases profits year after year will be worth more than a company that does not make regular profits, that is why in the long term the share price of a company who is increasing profits year after year will continue to go up. There will always be higher demand for companies regularly increasing their profits than for companies making less or no profits. –  Victor Nov 14 '13 at 2:57
Not the OP but I've always wondered the same. Concretely speaking, short of a bubble-like behavior of buying an asset because of a belief it will go up in price, what's the intrinsic value of owning an asset that produces no cash flow? You might give gold as an example, but at least I can make jewelry out of it (plus quite a few other uses). –  swineone Apr 19 '14 at 14:12

There are many stocks that don't have dividends. Their revenue, growth, and reinvestment help these companies to grow, and my share of such companies represent say, one billionth of a growing company, and therefore worth more over time. Look up the details of Berkshire Hathaway. No dividend, but a value of over $100,000. Not a typo, over one hundred thousand dollars per share.

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well there is much more to berkshire hathaway's price than that, its mainly because they only have a few shares outstanding and never split the stock, but ok –  CQM Oct 14 '12 at 14:19

people buy stocks because there is more to Return on Investment than whether dividends are issued or not.

Some people want ownership and the ability to influence decisions by using the rights associated with their class of stock.

Another reason would be to park capital in a place that would grow faster than the rate of inflation.

these are only a few of many reasons why people would buy stock.

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Nobody is going to buy a stock without returns. However, returns are dividends + capital gains. So long as there is enough of the latter it doesn't matter if there is none of the former.

Consider: Berkshire Hathaway--Warren Buffet's company. It has never paid dividends. It just keeps going up because Warren Buffet makes the money grow. I would expect the price to crash if it ever paid dividends--that would be an indication that Warren Buffet couldn't find anything good to do with the money and thus an indication that the growth was going to stop.

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actually they buy stock with the hope of gains. –  mhoran_psprep Oct 16 '12 at 1:16
So you are saying that IBM has not had any use for the money it has paid as dividends since 1967, and that in 1967, their growth "was going to stop"? Without having done any really deep reserach, I think I'd beg to differ. –  Michael Kjörling Dec 21 '12 at 13:56
@MichaelKjörling: It comes down to whether the investors believe the company can do a better job with the money than they can. For a big company not to pay dividends despite doing well takes a lot of trust on the part of the investors. People who buy Berkshire Hathaway have that trust. –  Loren Pechtel Dec 22 '12 at 2:37

Shares in a company represent a portion of a company. If that company takes in money and doesn't pay it out as a dividend (e.g. Apple), the company is still more valuable because it has cold hard cash as an asset. Theoretically, it's all the same whether your share of the money is inside the company or outside the company; the only immediate difference is tax treatment.

Of course, for large bank accounts that means that an investment in the company is a mix of investment in the bank account and investment in the business-value of the company, which may stymie investors who aren't particularly interested in buying larve amounts of bank accounts (known for low returns) and would prefer to receive their share of the cash to invest elsewhere (or in the business portion of the company.) Companies like Apple have in fact taken criticism for this.

Your company could also use that cash to invest in itself (growing the value of its profits) or buy other companies that are worth money, essentially doing the job for you. Of course, they can do the job well or they can do it poorly...

A company could also be acquired by a larger company, or taken private, in exchange for cash or the stock of another company. This is another way that the company's value could be returned to its shareholders.

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