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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....
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.
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.
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.
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.
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.
I don't know why there is so much confusion on such a simple concept. The answer is very simple. A stock must eventually pay dividends or the whole stock market is just a cheap ponzi scheme.
A company may temporarily decided to reinvest profits into R&D, company expansion, etc. but obviously if they promised to never pay dividends then you can never participate in the profits of the company and there is simply no intrinsic value to the stock.
For all of you saying 'Yeah but the stock price will go up!', please people get a life. The only reason the price goes up is in anticipation of dividend yield otherwise WHY would the price go up?
"But the company is worth more and the stock is worth more" A stocks value is not set by the company but by people who buy and sell in the open market.
To think a stock's price can go up even if the company refuses to pay dividends is analogous to :
Person A says "Hey buy these paper clips for $10". But those paper clips aren't worth that. "It doesn't matter because some fool down the line will pay $15". But why would they pay that? "Because some fool after him will pay $20" Ha Ha!
You can think of the situation as a kind of Nash equilibrium. If "the market" values stock based on the value of the company, then from an individual point of view it makes sense to value stock the same way.
As an illustration, imagine that stock prices were associated with the amount of precipitation at the company's location, rather than the assets of the company. In this imaginary stock market, it would not benefit you to buy and sell stock according to the company's value. Instead, you would profit most from buying and selling according to the weather, like everyone else. (Whether this system — or the current one — would be stable in the long-term is another matter entirely.)
Why do people buy stocks that pay no dividend?
Because they will have to start paying dividend or repurchasing shares, equivalently, in the future.
A company can be expected to have about 8% yield. Most large companies distribute about 3% dividend, meaning the company grows 5%. Now, if one company invests all of the profits to its own business, its growth is 8% per year, not 5% per year.
In 200 years, the company growing 8% per year is relatively 1.08^200/1.05^200 times or 279.83 times bigger, relatively speaking.
So if you own shares of an average-yield company that constitutes 1% of world economy and pays no dividend, in 200 years it would constitute 279.83% of world economy, a mathematical impossibility.
The only reason why a company would pay no dividend is that reinvesting into the business is a better idea than distributing the money to shareholders.
The only value of a company to its shareholders is dividends (or equivalently, share repurchases). The value of a company is the net present value of all distributed dividends, nothing more than that.
It does not matter if the company pays dividends already today, or if you have to wait for 200 years to get the first dividend. In both cases, the value of the company is just the same.
So, to summarize: because they will pay dividend, in the future.
W. J. Bernstein in "The Investor's Manifesto" describes Gordon growth model (Dividend discount model) as the next:
Total Return = Dividends / Price of share + Dividends Growth
So, in theory, the Return (and market Price of a share) equals 0, in the absence of the Dividends (either currently or future) [see also assylias answer].
However, there are some price's drivers, that makes it non-zero:
If the company has less than 50% of its stocks on a public market, then #3, #4, and #5 (listed above) are not so important. The intrinsic value of such stocks is based only on #1 and #2.
Ultimately the realisation of gain (i.e. income) can be deferred without resorting to a holding company or a trust.
Dividends are income, and attract tax. You may not want to pay that tax this year for any number of reasons. You may have to pay tax on Capital Gains, but you can choose when those gains are realised. At some future time, without parasitic leakage in the compounding process.
Yes I am aware the company itself will pay tax.
Because people want a share of the money that the company earns, which must eventually be returned to shareholders somehow. The way the company returns that money is either by issuing a dividend or buying shares from the shareholders that want the money.
A company that earns money doesn't necessarily have to return it to the shareholders - but ultimately the shareholders are the ones who decide this anyway (at some level of remove), so when enough of them want it, they can get it.
