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I'm new to the stock market and was wondering why stocks are so expensive when the dividends are so low. One share of apple costs 127 and its dividend is .22$. What exactly makes it worth so much?
I understand that there are non-dividend paying stocks/stocks where dividends are negligible, but what exactly does a buyer see value in if the stock is 127 dollars but they only make .22 a year?
Firms can achieve growth based on how investors rate their stocks.
For example you might be willing to pay $100 for a share of a stock that pays a steady $5 yearly dividend to get that 5% return but that stock might not appreciate much. If you put $120,000 in this stock then you would own 1200 shares and have a yearly gain of $6000 in dividends and still own $120,000 of the stock.
Another investor might be willing to pay $100 for a share of stock that pays a $0 yearly dividend but there is a chance the firm could achieve rapid growth or market penetration and their share price would jump to $120 in a year for a 20% return. If you put the same $120,000 in this stock then you would own 1200 shares and get a $0 yearly dividend but in one year your stock could be worth $144,000 for a gain of $24,000. So after that first year, you could sell 50 shares @ $120 each to "create" a "home-made dividend" of $6000 and still have 1150 shares left worth $138,000 (more value than the dividend case).
In the world of growth firms, many investors do not want firms to issue dividends and return that cash to investors because they believe the firm can use that cash to get a higher rate of return on that cash then they would get themselves.
Your question is valid in that there was often a "dividend premium" so that companies which issued dividends were valued higher than firms that did not issue a dividend. This was called the "dividend puzzle" However, more recent research indicates that the dividend premium or puzzle only exists when people do not have high ambitions for firms or when people are fearful. In high moving markets (like the recent bull market), investors tend to add a greater multiple to growth firms, some that not only do not pay dividends but are not even profitable.
Because dividends are only one thing that determines the stock price. Shares that keep going up in value are also desirable, even if they pay little or no dividend.
Since distribiting dividends decreases the net worth of the company, not paying dividends can increase the value of the company by retaining any profits.
