37

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....

|improve this question
  • 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
  • 5
    @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
  • 1
    "But the stocks themselves do not pay interests - so Apple's amazing revenue/profit records would not matter..." As someone who bought Apple at a split adjusted price of $0.99, let me assure you that even without the dividend, it very much matters. – Fomite Sep 8 '15 at 7:42
  • "so Apple's amazing revenue/profit " - joke? Apples profit is extremely bad for the company value. And that is all that matters. The profit in absolute is amazing, but the company is SOOO valuable that... well... – TomTom Mar 1 at 9:33
  • @TomTom As of today, Apple's PE ratio is 14.4 which is quite low compared to most everything else. Where do you get the idea that they have low profits? – zeta-band Mar 2 at 0:27
22

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.

|improve this answer
  • 1
    "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
  • 3
    @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
  • 1
    @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
  • 3
    @swineone - if a company is making increasing profits year after year and using those profits to grow and expand to make even higher profits, then I want to invest in that company because over time its intrinsic value is rising so its share price will also rise, so would I have the potential to make capital gains (even if they don't pay dividends). This is not a bubble situation, because the share price is increasing due to the value of the company increasing. If the share price increased due to hype rather than the increasing value of the company, then this could be a bubble situation. – Victor Apr 20 '14 at 21:36
  • 3
    @swineone - in fact I would rather invest in a company that does not pay dividends but is increasing profits and growing year after year than a company that pays dividends but its profits are decreasing year after year. How long will the company continue to pay dividends for if it starts making less and less profits to pay them with? You should never invest in a company solely because they pay dividends, if you do you will end up losing money. It is no use making $1 in dividends if you lose $2+ because the share price drops. – Victor Apr 20 '14 at 21:43
7

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.

|improve this answer
6

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.

|improve this answer
  • 8
    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
  • No split but they have A and B so you can buy shares in a share so to speak. – mckenzm Mar 1 at 5:12
5

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.

|improve this answer
  • actually they buy stock with the hope of gains. – mhoran_psprep Oct 16 '12 at 1:16
  • 3
    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. – a CVn Dec 21 '12 at 13:56
  • 3
    @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
3

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.

|improve this answer
1

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.)

|improve this answer
0

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.

|improve this answer
-1

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!

|improve this answer
  • 6
    There are also other ways a company might return money (share buybacks, takeovers, liquidation), but as you say in the end something has to happen. – GS - Apologise to Monica♦ Jul 29 '16 at 8:18
  • 2
    @GaneshSittampalam is exactly right; you don't need dividends to return money to investors, simply owning a share in the net value of the company gives the shares value whether or not they ever pay a dividend. – MD-Tech Jul 29 '16 at 10:29
  • 1
    @MD-Tech: I agree with PaulPena's broad point, I was just expanding on the list of ways a company can return money. But if a company is never expected to return money in any of those ways, its shares really are worthless. – GS - Apologise to Monica♦ Jul 29 '16 at 11:52
  • 1
    Of course, but the bulk of this answer is not correct. – JTP - Apologise to Monica♦ Jul 29 '16 at 11:56
  • 1
    @DavidSchwartz ok, "share buybacks" or "takeovers" (both listed in my initial comment) - the point is that normal share trading where the company continues as an independent entity doesn't count. – GS - Apologise to Monica♦ Dec 13 '16 at 10:39

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.