Example: Sprint (S) does not pay dividends to their investors while AT&T (T) and Verizon (VZ) do. Why invest in something that won’t give you some kind of return?

 

  • C Brown 5:01 pm on July 7, 2010

    When companies earn money, (for example Walmart generated about $25 billion in cash flow in 2009) the upper management of the company has 2 choices.

    1) Pay a dividend to shareholders
    2) Reinvest in the company so that in the future the company earns more money, can potentially pay higher dividends, and becomes more valuable.

    While it is true that certain investors prefer dividends, dividends do not always offer the highest rate of return. If given Walmart’s stock price, the company could pay a 10% annual dividend to shareholders by simply paying out its earnings as a dividend OR Walmart could build a new Walmart store and earn a 20% rate of return from the new store, then it would actually be more intelligent for management to focus on growth instead.

    What would essentially happen is if Walmart chose to use all of its 2009 earnings to build new stores at a 20% return, then in 2010 we should expect Walmart to generate 20% more in annual revenue, income, and cash flow. This would recur forever in theory, so therefore the stock prices should become 20% more valuable.

    Would you prefer 20% in the form of capital gains (when the stock price goes up) or 10% in the form of a dividend yield?

    Surprisingly many investors still prefer the dividends, despite the lower rate of return. So many companies choose to pay a portion of their earnings out as dividends. In the US, it is less common for companies to pay large dividend payout ratios. However in Britain, it is a part of corporate culture to pay larger dividend payouts. This results in slower company growth than in the US, but many shareholders are willing to accept the trade-off for a reliable, growing income.

  • Judy 5:01 pm on July 7, 2010

    Companies that pay dividends usually don’t move up in stock price as quickly as those that don’t.
    Some people call dividend paying companies sleepers.
    /

  • Kevin 5:01 pm on July 7, 2010

    Dividends are not necessarily gains, it is just a way to receive cash from your investment. For instance, if ACME, Inc. shares are trading for $10.00 per share, and they declare a dividend of $1.00 per share, the share price will drop to $9.00 per share.

    So the question is, would you rather own 1 share worth $10.00, or 1 share worth $9.00 with a dollar in your pocket?

  • Stock Trading Warrior 5:01 pm on July 7, 2010

    Some investors look for larger price gains rather than regular dividends. The thinking is that if you know how to find great, upward moving stocks that gain 20% or even much more in several months, versus a dividend stock that doesn’t gain in price very much and only earns at 5-8% a year, the bigger gainer is the one to buy. If you’re earning 20% or more over the course of a few months, then it doesn’t matter if the stock pays dividends because it’s already better return on your money.

    However, if the stocks you mentioned are the group you have decided to choose from then yes, a dividend should become part of the decision making process.

  • Brian 5:01 pm on July 7, 2010

    Ultimately, the only reason to buy a company at all is for the cash that it will pay out to you from earnings (i.e., the dividends). That is the only assured way of getting your investment back. The reason to invest in a stock without dividends is based on the hope that one day they will pay dividends.

    Your time horizon affects the realization of your profits in that shorter-term speculators will drive the price up and down based on near-term expected operational results. So, a second reason to buy stocks without dividends is to speculate on intermediate and short term price movements due to an improved business outlook. While this style of investing is more exciting and has greater return potential near-term, it’s more volatile and requires a different focus than investing based on dividend flows.

  • Common Sense 5:01 pm on July 7, 2010

    The growth should be in the appreciation of the share price. In theory these stocks (non dividend payers) should grow quicker.
    I hold S (Sprint). It’s a wild ride. I’ve made some good money because I’ve been able to successfully trade this stock. Although the chart looks pretty bad…. I’m holding this.
    Target: $9.40
    Stop: right below 200 day moving average.

    If you’re not too experienced in trading…. I would suggest staying away from Sprint. You could get burned.

  • tolstoi1 5:01 pm on July 7, 2010

    Growth stocks typically reinvest their revenues because
    1) that’s how they grow, and
    2) it minimizes taxes which maximizes stockholder gains.

    When a company stops growing, it can pay dividends or repurchase their stock.

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