Dividends are one of the sources of income for an investor. However, the payment of dividends is not an obligation of the company. How often and how dividends are paid out is prescribed in the dividend policy.
When a company makes a profit, it can spend it in various ways:
• Pay dividends to shareholders
• Invest in business development
• Buy back part of its shares
According to Warren Buffett, it is better not to pay dividends at all, but to direct all profits to business development, this should have a positive effect on stock prices.
So does it make sense to buy shares in a company that does not pay dividends?
A company that invests in its development: updates equipment, releases new products and absorbs competitors, looks attractive in the eyes of investors. It is expanding, which means it can bring even more profit. Shares of such a company are growing in price.
If the management of the company does not pay attention to business development at all, after some time a more technological competitor will necessarily appear on the market, which will lead to a decrease in quotations.
Of course, it is likely that the company's profits will be reinvested inefficiently. An urgent need not to pay dividends at all is only for young companies that have recently entered the market.
Developed companies can already afford to pay dividends without losing a competitive advantage in the market. Sooner or later, the market capacity will end, and the company will make a profit on payments to shareholders. This statement is true primarily for manufacturing companies.
The same Berkshire Hathaway of Warren Buffett, who is engaged in investment activities, did not pay and is not going to pay dividends, since she can not worry about market saturation. Facebook and Yandex have also never paid dividends.
But the world famous company Apple, which makes money by selling gadgets, adheres to a different strategy: depending on the market situation, it either pays or does not pay dividends to shareholders. These companies have one thing in common – a stable growth of stock quotes over a long horizon.
It turns out that investing in stocks of companies that do not pay dividends, the investor can earn only on the growth of the price of a share. In most cases, this is what happens. The company invests in its development, new opportunities for profit appear, the company becomes more and more attractive in the eyes of investors, which means that its shares are going up.
But there are two significant risks when buying shares in a company that does not pay dividends:
- Ineffective reinvestment of profits by company management. As a result, the absence of further growth in profit and value of shares.
- The market may unfairly evaluate the company's shares, and quotes will not rise again.
When deciding whether to invest in companies that do not pay dividends, pay attention to the following points:
- What sector of the economy does the company belong to and what does it do. If it is a stable production company, then sooner or later it will begin to pay dividends, not tomorrow, so in ten years.
- If the company does not belong to the manufacturing industry, and it is not planned to saturate the market with its product or service, pay attention to the manual.
Whether reinvestment of profits is carried out correctly, whether innovative products have been released, whether the acquired assets bring profit. If the answer is yes, then the company management has chosen the right strategy, and all other things being equal, you can safely invest in such a company – the price of its shares will rise.