What is the incentive to buy a stock without dividends?

By Investopedia Staff AAA
A:

While dividends are the only direct income (money paid out), the total return of holding, a stock is the dividend plus the capital gain of the stock price.

Dividend-paying stocks consist mainly of well-established and mature firms. These companies have grown to a point where they are now leaders in their industries, characterized by having slow but very steady earnings growth. These established companies are mainly concerned with keeping shareholders happy with dividend payments. These companies tend to maintain dividend payments, providing a sense of safety to investors looking to diversify into the equity markets without the high risks of investing in growth companies.

In the past, the market considered non-dividend-paying stocks to be typically growth companies, since expenses from growth initiatives were close to or exceeded their net earnings. This is no longer the rule since a transformation has occurred in today's modern market: firms have decided not to pay dividends under the principle that their reinvestment strategies will, through stock price appreciation, lead to greater returns for the investor. Thus, investors who buy stocks that do not pay dividends prefer to see these companies reinvest their earnings to fund expansion and other projects which they hope will yield greater returns via rising stock price. Although these are generally small- to medium-cap companies, certain large caps have also decided not to pay dividends in the hopes that management can provide greater returns to shareholders through reinvestment.

RELATED FAQS

  1. What are the most common momentum oscillators used in options trading?

    Read about some of the most common technical momentum oscillators that options traders use, and learn why momentum is a critical ...
  2. How are Bollinger Bands® used in options trading?

    Use Bollinger Bands to identify volatility changes and place options trades at the right time; profit in bull or bear markets ...
  3. Why is it important to understand the Circular Flow Of Income when making investment ...

    Find out why investors should pay attention to a firm's circular flow of income model to measure its efficiency and evaluate ...
  4. What's the safest way to invest in high-yielding dividend stocks?

    Learn about some of the most important safety factors that you need to consider before you invest in high-yielding dividend ...
RELATED TERMS
  1. Accelerated Dividend

    Special dividends paid by a company ahead of an imminent change ...
  2. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  3. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  4. Short Put

    A type of strategy regarding a put option, which is a contract ...
  5. Wingspread

    To maximize potential returns for certain levels of risk (while ...
  6. Volatility Smile

    A u-shaped pattern that develops when an option’s implied volatility ...

You May Also Like

Related Articles
  1. When most investors begin planning for a steady income stream in retirement, they tend to gravitate towards fixed-income as a predominant asset class.
    Mutual Funds & ETFs

    Funds That Should Be On Every Investor’s ...

  2. Though dividends are thought to realm of conservative investors, they deserve a place in all portfolios. Here are some of the best bets.
    Trading Strategies

    The Best Bets In Dividend Stocks

  3. Lifestyle inflation occurs when 'you earn more, you spend more', and your spending ends up matching your earnings. Thus, no savings remain.
    Budgeting

    Failing To Build Wealth Despite Making ...

  4. Options & Futures

    Stock Futures vs Stock Options

  5. First time stock investors may ask, is there any way to buy insurance on stocks to prevent losses?
    Options & Futures

    Stock Safety: Top 3 Ways to Limit Your ...

Trading Center