A dividend is a distribution of a portion of a company's earnings paid to a class of its shareholders at the discretion of the board of directors. Investors often view the company’s dividend by its dividend yield, which measures the dividend in terms of a percent of the current market price.
Companies That Pay Dividends
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.
Companies in the following sectors and industries have among the highest historical dividend yields: basic materials, oil and gas, banks and financial, healthcare and pharmaceuticals, and utilities.
Reasons to Buy Non-Dividend Paying Stocks
In the past, the market considered non-dividend-paying stocks to mainly be designated as growth companies since expenses from growth initiatives were close to or exceeded their net earnings. This is no longer the rule 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.
A non-dividend paying company may also choose to use net profits to repurchase their own shares in the open market in a share buyback.