First Published on June 2nd, 2022. This article is a guest contribution by Ryan Scribner from Investing Simple.
When it comes to dividends investing in the stock market, you primarily have two types of investors out there.
The first is a growth investor. This is someone who is looking to put their money behind companies that are expanding and scaling operations. In turn, this should translate to growth in revenue or total sales. Many of these companies are unprofitable, but that is the price you pay for high innovation. The goal with growth investing is to buy shares at a low price and sell them later on for a profit.
The second type is an income investor. This type of investor is looking to hold stocks that pay dividends. For those who are not familiar, dividends are a way that a well established and profitable company shares their earnings with shareholders. Most income investors are solely looking at companies that pay dividends when making investments. The goal isn’t so much to grow the share price.
Instead, it’s to get paid while holding onto shares through dividends. Investors want those quarterly or annual dividend payments for the purpose of reinvestment, or income for some other purpose. Reinvestment allows for compound interest, a powerful wealth-building economic phenomenon. As such, dividends are a fantastic way to earn compound interest.
Companies in the growth stage rarely pay dividends. In fact, many of these companies are not even profitable yet. They are focused on acquisitions, expansion, product development and all of these other things that cost a lot of money. As a result, they simply cannot afford to pay a dividend. Most companies begin paying dividends as a way to entice and reward shareholders. These dividend payers are often companies that do not have massive growth potential. That is largely due to the fact that a lot of their growth happened many years ago. They have now become titan’s of their industries.
It is important to remember, however, that dividends are never guaranteed. A company can cut or cancel a dividend at any time. Generally speaking, companies like to continue paying dividends and continue increasing them to earn the trust of shareholders. This is often referred to as the dividend growth streak. If you are looking for a list of companies that have both paid and grown dividends the longest, check out my resource on Dividend Aristocrats here.
So now we understand why growth stage companies do not pay dividends and why well established companies do. But what about well established, cash flowing companies that don’t pay a dividend? It is a strange yet common phenomenon. Remember, there is no law or requirement out there that says a company has to pay dividends to shareholders, so many companies don’t!
Here are some of the most well known, large companies that do not pay dividends…
Note: Click on the links below to read analysis on if these companies will ever pay a dividend.
- Facebook (FB)
- Google (GOOG)
- Amazon (AMZN)
- Berkshire Hathaway (BRK.A)
So, what gives? Consider Berkshire Hathaway for example. In Q1 of 2022, it was reported that they have $106 billion in cash! Or look at Amazon, they did over $469 billion in revenue in 2022. All of these companies mentioned could reasonably afford to pay a dividend to shareholders, but they don’t pay a penny. And yet, the share price still climbs. While I don’t have a crystal ball, here are a few logical reasons why they don’t pay dividends.
In this article
Reason #1 – Reinvesting Profits
The first reason why some companies do not pay dividends is because they would rather reinvest those profits back into the business. This is exactly what growth stage companies do, but some companies never stop! Consider Amazon for example. Rather than paying dividends to shareholders, the management team believes they can deliver better value to shareholders by reinvesting the profits back into operations. Not only that, this is a legal way for Amazon to avoid taxes as well!
This is one of the main reasons why companies like Amazon are so innovative. They generate a boat load of cash, and then they reinvest that cash back into new products, ideas and services. If companies like Amazon or Google that reinvest cash heavily have a big win, it will ultimately make the share price climb higher which brings value to the shareholders.
Reason #2 – Acquisitions
Another reason why companies will hold off on dividend payments and hoard cash is for acquisitions. This happens when one company essentially purchases another one, and they merge under one entity. Another common occurrence is when a company will purchase an ownership stake in another company.
Acquisitions are something that Warren Buffett is very well known for. He is the chairman and CEO of his company Berkshire Hathaway, mentioned earlier. Rumor has it that he has earmarked all that cash (over $100 billion!) for a major acquisition. Buffett has spoken out against paying dividends in the past, stating that money can be spent better in other ways. He believes, and has proven, that he can deliver more value for shareholders through reinvestment and acquisitions.
Reason #3 – Debt/Financial Trouble
Here’s a different scenario to consider. Sometimes you will run into a company that used to pay a dividend, but no longer does. Or, they slash the dividend. The main reason behind this is financial hardship. As mentioned earlier, companies generally like to continue paying dividends, as this attracts shareholders and keeps them around. However, sometimes you will run into a company that has to cut or eliminate a dividend due to financial troubles.
Consider General Electric (GE) for example. For decades, they were known as a great stock for income investors with a very safe dividend. After their unraveling began in 2017, more bad news followed. Finally, in December of 2018 it was announced that they would slash the dividend to a penny a share.
The reason behind this is because paying a high dividend at this point in time was financially irresponsible. At one point in time, the future was uncertain for GE based on the financial health of the company. The best way they could bring value to shareholders was to get the company back on track. This meant that the money being spent on a high quarterly dividend was better spent paying down debts and bailing out the company.
Closing Thoughts
We will always have some companies that pay dividends and some that do not. Occasionally, we have the white elephants like Google, Facebook, Berkshire Hathaway and the other companies mentioned above that do not pay dividends despite a clear ability to afford one.
In summary, the main reason for not paying a dividend is because these companies have decided they can better spend the money elsewhere, and investors in these companies believe them! I’ll put it this way, would you rather invest $1,000,000 or have Jeff Bezos invest $1,000,000? Most people would choose Jeff Bezos, based on his track record, and that is why they are comfortable with investing in Amazon even though they don’t pay a dividend.
This article was first published for Sure Dividend
Sure dividend helps individual investors build high-quality dividend growth portfolios for the long run. The goal is financial freedom through an investment portfolio that pays rising dividend income over time. To this end, Sure Dividend provides a great deal of free information.
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