07:06
Future
Why do people buy stocks which don't pay dividends?
What's in it for me if I buy a stock which pays no dividend?
I own a piece of the company fine, but what does that do for me if I don't get a share of their profit?!
I own a piece of the company fine, but what does that do for me if I don't get a share of their profit?!
Ans:
When a company has cash earnings, it has two choices about what to do with those earnings. They can pay them out as dividends or they can reinvest them back into the business. If they choose to reinvest them back into the business, the business grows and your stock represents ownership of an ever-growing business. The larger business should create even more earnings. This is compounding.
Further, you don't get taxed on reinvested earnings but you do get taxed on dividends. You only get taxed on reinvested earnings when you sell the stock.
That means that if a company chooses to reinvest dividends you get compounding and tax deferral and you can still create your own "dividends" by selling some shares of stock whenever you want. In finance, there is a principle called "Dividend Irrelevance" that says that the dividend rate is irrelevant to the stock price for the reasons I've just listed.
In the real world, there is some evidence that you can get better total returns from buying stocks with dividends (though I doubt it's true if you include tax deferral) simply because dividend paying companies have reliable cash flow. You can certainly get at reliable cash flow in better ways than just looking at the dividend rate (e.g., AAPL has relaible cash flow but no dividends).
There is also some advantage to dividends if you are living off them as selling some stock every month or so would be painful and frought with errors.
Further, you don't get taxed on reinvested earnings but you do get taxed on dividends. You only get taxed on reinvested earnings when you sell the stock.
That means that if a company chooses to reinvest dividends you get compounding and tax deferral and you can still create your own "dividends" by selling some shares of stock whenever you want. In finance, there is a principle called "Dividend Irrelevance" that says that the dividend rate is irrelevant to the stock price for the reasons I've just listed.
In the real world, there is some evidence that you can get better total returns from buying stocks with dividends (though I doubt it's true if you include tax deferral) simply because dividend paying companies have reliable cash flow. You can certainly get at reliable cash flow in better ways than just looking at the dividend rate (e.g., AAPL has relaible cash flow but no dividends).
There is also some advantage to dividends if you are living off them as selling some stock every month or so would be painful and frought with errors.
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