Why do people buy stocks that pay no dividend?

Question

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....

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 06:23
"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 08 '15 at 07:42
"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 01 '19 at 09:33
@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 02 '19 at 00:27
This is my #1 question in the stock market. It's like magic, or a game, or a scam. There's no solid value in a stock that doesn't play dividends. It's all magical thinking. It's gambling. Somewhere, somebody decided it was worth owning part of a company. So you buy into that company hoping somebody else wants to own it more than you do, so you can sell it to them for a profit. To me, it's no different than beanie babies or tulips. At least with beanie babies, you physically own a toy. — scott.korin, Mar 11 '20 at 12:29
@scott.korin Exactly. But the market doesn't consist of a fixed set of participants, buy and selling to each other. As a very, very rough approximation, you have a larger number of people starting to invest than you do trying to cash out, which means investors have to compete to acquire shares as they become available from people cashing out. This has a natural tendency to drive prices up, as long as the combination of new capital and retirees is not enough to saturate demand for retirement savings. — chepner, Jun 08 '21 at 13:36
(So essentially, as long as population growth is positive, stock can have real value without paying a dividend.) — chepner, Jun 08 '21 at 13:37

Victor · Answer 1 · 2013-04-15T13:02:52.653

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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.

edited Apr 15 '13 at 13:02

answered Oct 14 '12 at 03:58

Victor

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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 03:05
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@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 04:32
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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
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@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 02:57
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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
@swineone: with stock, there's still the factor that you own a part of the company and if you own enough stock, you get to decide what the company does - you could just order the CEO to start paying dividends. And if you own just a few shares, you could sell them to someone who plans to do that. – Michael Borgwardt Apr 19 '14 at 15:03
@MichaelBorgwardt, that might explain the reasoning behind Warren Buffett, or some other huge institutional investor, buying stocks in a company without dividends -- and I'm still not convinced it explains the case of, say, Apple. (They did start paying a dividend but it had more to do with the chance event of Steve Jobs' death than anything else IMHO.) But for an investor of modest means like myself, short of believing in a bubble-like behavior I mentioned, can you (or anyone else) explain how I'm supposed to make money with a non-dividend-paying stock? – swineone Apr 20 '14 at 03:18
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@swineone, why do people buy real estate that they don't rent out whether it be a primary residence or a summer home? Those don't produce cash flow yet still get bought regularly. Ever look into angel investors or venture capitalists? I'm pretty sure in those cases the investors aren't expecting dividends because they are expecting the company to grow and then sell shares later after the growth has happened. Ever consider how some employees may be given stock options in their employer that may be a non-dividend paying stock? – JB King Apr 20 '14 at 05:35
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@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
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@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
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By itself this is circular. What good is it to the investor that the company grows and makes a profit if it never pays a dividend? The only reason is that eventually, it probably will. – RemcoGerlich Mar 01 '19 at 19:55
@RemcoGerlich - there are different market participants with varying reasons to why they buy a certain stock. When a company is making good profits and growing year after year, it is building its assets up. A company might have been worth say $100M 10 years ago and today is worth $10B. Do you not think that the share price would have increased during that 10 year period? Do you not think that there would be more buying demand for its stocks? It is not circular at all. There are pleanty of both traders and investors that look for long term growth stocks that will keep going up over time. – Victor Mar 02 '19 at 08:24
Dividends are only one way to profit from investing in shares, and it isn't the main one - the main way to profit from investing in shares is through capital gains. – Victor Mar 02 '19 at 08:27

score 7 · Answer 2 · answered Oct 13 '12 at 15:59

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.

JTP - Apologise to Monica · Answer 3 · 2014-06-26T14:46:34.737

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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.

edited Jun 26 '14 at 14:46

answered Oct 13 '12 at 22:10

JTP - Apologise to Monica

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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
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No split but they have A and B so you can buy shares in a share so to speak. – mckenzm Mar 01 '19 at 05:12

score 6 · Answer 4 · answered Oct 15 '12 at 22:56

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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.

answered Oct 15 '12 at 22:56

Loren Pechtel

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actually they buy stock with the hope of gains. – mhoran_psprep Oct 16 '12 at 01:16
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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. – user Dec 21 '12 at 13:56
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@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 02:37

score 4 · Answer 5 · answered Oct 15 '12 at 23:05

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.

score 3 · Answer 6 · answered Jul 29 '16 at 07:56

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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!

answered Jul 29 '16 at 07:56

Paul Pena

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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 08:18
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@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
Berkshire Hathaway. "Get a life?" Really? – JTP - Apologise to Monica Jul 29 '16 at 11:42
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@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
@JoeTaxpayer presumably people expect to get money out of it sometime – GS - Apologise to Monica Jul 29 '16 at 11:53
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Of course, but the bulk of this answer is not correct. – JTP - Apologise to Monica Jul 29 '16 at 11:56
@JoeTaxpayer if you substitute "returning cash" for dividends (to add the other senses I listed), I think it's exactly right. Which bit do you disagree with? – GS - Apologise to Monica Jul 29 '16 at 12:24
@GaneshSittampalam That makes the answer right, but meaningless. One way a stock can return cash is if the investors sell it for a higher price. So while your suggested change makes the answer correct, it also makes it not answer the question. – David Schwartz Dec 13 '16 at 08:54
@DavidSchwartz that's not the company returning cash, unless it's a share buyback. – GS - Apologise to Monica Dec 13 '16 at 09:24
@GaneshSittampalam Well if you interpret it that way, then the answer would be wrong. For example, the company could be acquired by another company that buys the shares and then uses the company's factories to build its products (or uses its IP only in its own products). The company never returns anything to the investors. But surely that's no scheme. – David Schwartz Dec 13 '16 at 09:30
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@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
I think you described it perfectly – Dvir Jun 24 '20 at 20:28

score 1 · Answer 7 · answered Dec 29 '19 at 17:01

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.

score 1 · Answer 8 · answered Jun 08 '21 at 09:06

Theory

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].

Practice

However, there are some price's drivers, that makes it non-zero:

possibility of future dividends
bankruptcy - liquidation of company assets, shareholders receive what's left after creditors and employees (in that order) [Jubble's comment]
buybacks - company buys it's own stocks (dsollen's question)
takeover (include a hostile one) - acquirer buys stocks (often above the current market price) [Tom's answer, Jay's answer]
voting - a value of vote at the stockholder's meeting [keshalm's answer]

Partially traded company

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.

score 1 · Answer 9 · answered Jun 14 '15 at 07:57

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.)

score 0 · Answer 10 · answered Mar 01 '19 at 05:24

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.

score 0 · Answer 11 · answered Jun 08 '21 at 18:15

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.

Why do people buy stocks that pay no dividend?

11 Answers11

Theory

Practice

Partially traded company

Linked

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