October 11, 2011 | In: General
Why Buy Stocks With No Dividend?
Often, new investors think why would anyone buy stocks that pay no dividends? After all, dividends are how you can make money out of stocks, no? Well, dividends are one way that you can make money out of stocks, there are other ways, mainly selling stocks when they go higher. In fact, real investors don’t rely at all on dividends that are just a few percentage points to make money out of stocks, they rely on the appreciation of stocks with time.
In the old days, companies used to go public and then they would start paying dividends as soon as they start making money out of their new investments. Dividends, back then, were the reason why investors bought stocks. The game has changed since then, noawadays, investors don’t care about dividends as before, they’re lending money to the company so that it can grow, because they know that the growth of the company is proportional to the appreciation of its stock. In fact, companies now understand this shift in investors’ thinking, and many of the listed companies nowadays are non-dividend paying companies. Apple, the hottest company listed on the NASDAQ and the American stock exchange in general, pays no dividends. Not only that, the last time that Apple paid dividends was back in 1995, that was 16 years ago, and I’m sure that we all agree that Apple is doing much better right now than it was doing 16 years ago, when it was selling ugly Macs for die-hard fans and graphic designers. Google is also one of the hottest stocks in the US market, and it doesn’t pay any dividends (not only that, Google has never ever paid any dividends).
Now, just for fun, let’s assume that both Apple and Google pay each 4% dividend every year (by the way, 4% is a very good dividend – note that high dividends are not usually a good sign). Let’s see if the stocks did not appreciate throughout the years, would it have been better for investors if these two companies only paid dividends? Let’s see…
Apple started trading at $4 back in 1981, if again, the dividend was 4% every year and the stock did not appreciate, then investors would have made a whopping $4.8 (16 cents every year) in 30 years! That’s 120%! The stock right now is trading at $400, so you do the math (nearly 10000% increase). I think it’s clear that relying on the appreciation of the stock was much better than relying on the dividends.
Google started trading at $100 back in 2004, so, for a 4% dividend, investors would have made $28 over the course of 7 years, which is much less than the $445 they would have made (per stock) if they relied on the growth of Google.
Call me a greedy investor, but between dividends and stock appreciation, I’d go with the latter. So yes, there is a reason why investors buy stocks with no dividend, that’s because these stocks tend to appreciate exponentially.
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