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Table of Contents. The Creation of Investor Stock Shares. When Companies Pay Dividends. Compounding The Dividend Decision. Book Value vs. Real Value. Putting It Together. An Example From Wall Street. Learn about our editorial policies. Reviewed by Charles Potters. Article Reviewed July 29, Charles is a nationally recognized capital markets specialist and educator with over 30 years of experience developing in-depth training programs for burgeoning financial professionals.
Charles has taught at a number of institutions including Goldman Sachs, Morgan Stanley, Societe Generale, and many more. 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. Show 7 more comments. Active Oldest Votes. It's important to remember what a share is. It's a tiny portion of ownership of a company. Improve this answer. Stephen Stephen 2, 2 2 gold badges 8 8 silver badges 7 7 bronze badges. Note that there is the alternative of reinvesting some and giving some as dividends. This is a continuum, not a binary choice. Correct, I was presenting the binary though to better explain the concept.
Could also add, that when dividents are paid out, the value of the company decreses accordingly after all, it has just paid out lots of money , which means the value market value of the shares you own the value of your stock also decrease.
JoeTaxpayer that's not what I meant. It's much easier to grow faster when you're smaller. So they invest some of it and give some of it to their investors, as smaller investors can do disproportionately better with the same amount of money. Warren Buffet has often talked about how he could find much better investments if he didn't have so much money to invest.
I think this answer and most others shown here skirts the actual question that the OP asked. I believe he was asking why a share of stock would hold any intrinsic value whatsoever, e.
That is, why should the profitability or assets of a company impute some perceived value to its shares? Instead, this is really just an argument against payment of dividends in many cases, not an answer to the OP's question. A good answer, but it just doesn't seem to address this question. Show 16 more comments. Scott Scott 4, 3 3 gold badges 11 11 silver badges 10 10 bronze badges. There has to be an expectation of dividends at some point down the line.
Otherwise it is just fine art collecting. Sure, this might be why many people do it, but the fundamental, underlying reason that some successful or on their way to successful companies have little or no dividends is because they are reinvesting for growth. Just because a sector of the market speculates on these companies short-term doesn't change why the companies have value.
In their adjusted share price was 44c. One share bought 25 years ago would be yielding roughly 3 times its value in dividends alone today. That's why companies that don't pay dividends trade. If you could go back in time and purchase Microsoft shares in , would you be willing to pay double or even triple their price?
I would. They were cheap back then. They may even be cheap now. Yet they likely didn't pay a dividend back then. Fundamentally misunderstands what the assumption of rationality means, and highlights as irrational something that doesn't actually violate that assumption.
Show 9 more comments. The company itself has value, in the form of: Real physical assets buildings, a fleet of vehicles, desks, inventory, raw materials Intangible assets cash, investments, intellectual property, patents Branding recognizable product, trustworthy company name, etc. Established customer base cell phone carrier with customers on contracts Existing contracts or relationships Hulu may have secured exclusive rights to stream a particular network's shows for X years You get the idea.
A company's value is based on things it owns or things that can be monetized. By extension, a share is a piece of all that. I'm not sure this really addresses the core of the question, because, while yes, the shares I hold mean that I own 0. DanHenderson in this case, effectively, the share is the asset. If someone wants to buy the whole company, they can't do so without paying you for your share.
Additionally, at least theoretically, you do have a claim on the underlying assets that affect the valuation of the company, you just lack the voting power to force it to be broken up or distributed. Jason thanks. I think If someone wants to buy the whole company, they can't do so without paying you for your share. DanHenderson the most direct way to think about it is not that the whole company is being bought out, but that you "buy-out" your shares when you buy them, and someone else "buys-out" those shares when you sell them.
It's not the entire company as a whole Add a comment. I can think of a couple reasons: Expectation of a future dividend. While stock valuation schemes will vary, both dividends and acquisition prices are related to a company's profits: A more profitable company can afford to pay more money out to shareholders.
A more profitable company will fetch a higher price to an acquiring entity because it provides the ability to generate more future cash. Jason R Jason R 1, 1 1 gold badge 14 14 silver badges 18 18 bronze badges. This is probably the best-formulated answer here. The one thing missing was touched upon by others: some stocks allow their owners to vote. While many owners will not care, for others employees, customers, business partners, troublemakers can be the right to vote and speak during important company events crucial.
Superbest Superbest 2, 3 3 gold badges 16 16 silver badges 24 24 bronze badges. Most good and healthy companies make enough profits to both pay out dividends and invest back into the company to keep growing the company and profits. In fact a good indication of a well performing company is when their dividend per share and earnings per share are both growing each year and the dividends per share are less than the earnings per share that way dividends are being paid out from new profits and not existing cash holdings.
This information can give you an indication of both a stable and growing company. For some investors, there is an additional advantage of purchasing a dividend-paying stock instead of just selling a portion of your position on a regular basis: tax treatment.
In the US, for example, it's possible that the income taxes due on dividend income are less than the amount due if the same income were to be made by selling stock and triggering a capital gain, especially if it were a short-term gain.
I think you should emphasize that shares are ownership, i. I think that's the key element to this question. KennyEvitt, no it is not. The fact that you can make money on stocks by buying them, then selling later at a higher price, isn't news to anyone. The question is why the price should increase or even exist in the absence of an expected payout in the form of dividends.
There are answers to that question, but none of them are given here. Shareholders can [often] vote for management to pay dividends Shareholders are sticking around if they feel the company will be more valuable in the future, and if the company is a target for being bought out.
Greater fool theory. If a shareholder only has a couple votes though, then how much of a difference can he really make? Also, why does a shareholder want to stick around if the company is going to be bought out? I'm not convinced I agree re "greater fool theory", but yes, the presumption is that the company will eventually be bought out.
It's a gamble, but hopefully you aren't making this choice of investment without some reason to be confident. CQM: If you have good reason to believe the company's value is increasing fast enough to justify the higher price, a fool is not required.
If you believe this without good reason, that's a different matter. Show 12 more comments. Companies Own Valuable Stuff I haven't seen any of the other answers address this point — shares are a form of ownership of a company and thus they are an entitlement to the proceeds of the company, including proceeds from liquidation.
Consider a possible sequence of major events in this company's life: The company raises money from investors e. Investors are issued shares in proportion to the amount they invest. The company purchases assets, e. The company puts on the one-time event, both spending money on, e. The company 'commits suicide', i. Other Sources of Company Value Besides just the stuff that a company owns, why else would owning a portion of a company be a good idea, i.
Growth Buying shares of a company is a good idea if you believe and are correct that a company will make larger profits or capture more value e. Some notes on time preference: Different people can have wildly divergent time discount preferences. Humans seem to be mathematically inconsistent in their discounting! Dividends If shares in a company pays dividends then the company gives you money for owning shares. Other Sources of Stock Share Value As CQM points out in their answer , part of the value of stock shares, to those that own them, and especially to those considering buying them, is the expectation or belief that they can sell those shares for a greater price than what they paid for them — irrespective of the 'true value' of the stock shares.
Community Bot 1. Kenny Evitt Kenny Evitt 1 1 gold badge 3 3 silver badges 17 17 bronze badges. The answer is Discounted Cash Flows. Paul Dacus Paul Dacus 2 2 bronze badges. Remember that long term appreciation has tax advantages over short-term dividends.
If you sell the stock that day, you owe taxes on that gain. Jesse Barnum Jesse Barnum 3 3 bronze badges. This doesn't answer the question. The OP doesn't understand why stocks are valuable at all, i. The reason of course is that companies own stuff that's worth something, hence owning a portion of the company is — if nothing else — partial ownership of stuff that's worth something. And that's true even if companies don't last forever. I felt that that point had been sufficiently made my many other answers, so I was attempting to add some additional related information.
Thanks for the downvote. There isn't clear and decisive guidance about whether answers should be comprehensive , but I think they should be and your answer is extremely incidental. I also can't change my vote until you edit the answer.
The company gets it worth from how well it performs. Source Code Source Code 2 2 gold badges 3 3 silver badges 10 10 bronze badges. But, why? If the company doesn't pay out dividends, what does it matter to the investor how well it performs? If the stock is inherently completely worthless it does nothing , then it's mind-boggling that people would attach value to it like that The point is capital gain, you make money once you sell it.
Why would you buy a stock for dividends if then it performs bad? You'll end up selling it and losing immibis — Source Code. The problem is you are answering the question "why do stocks that don't pay dividends have value" with "the value of stocks without dividend can go up".
It's completely begging the question, it's an incomplete answer. I used a house as an investment reference. Although simple on paper, there are some things to watch for with the dividend yield.
Inconsistent dividends or suspended payments in the past mean that the dividend yield can't be counted on. Like water, dividends can ebb and flow, so knowing which way the tide is going —like whether dividend payments have increased year over year—is essential to making the decision to buy. Dividends also vary by industry, with utilities and some banks typically paying a lot whereas tech firms, which often invest almost all their earnings back into the company to fuel growth, paying very little or no dividends.
By combining these methods of valuation, you can get a better view of a stock's worth. Any one of these can be influenced by creative accounting—as can more complex ratios like cash flow. As you add more tools to your valuation methods , discrepancies get easier to spot. These four main ratios may be overshadowed by thousands of customized metrics, but they will always be useful stepping stones for finding out whether a stock is worth buying.
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