Unravelling: Why Some Companies Choose Not to Pay Dividends?

There are two ways to make money with stocks: price change or dividends. The latter method of generating profits is widely used by investors who seek to have different sources of passive income. Therefore, they place great value on companies with strong distributions of dividends. This is because many investors prefer a secure and periodic return rather than an uncertain capital gain.

why do people buy shares of stocks in companies that do not pay dividends

Nowadays, there are company stock and shares that do not pay dividends. Why are there companies that do not pay dividends? How do investors and shareholders make return on investment? Proceed on this guide to find answers.

Why are there companies that do not pay dividends?

The dividends are the part of a company's profits that it periodically distributes among its shareholders. It is a form of passive management in which the shareholder receives benefits for owning spot shares. Now, not all companies pay dividends to their shareholders, why?

Well, the payment of dividends is a form of remuneration used by large companies, that are already firmly consolidated and have economic maturity, that are well established in their field and that are profitable in the long term. They have solvency and abundant and constant cash flows, so they use a part of these profits to distribute them as dividends. This means that the company is solid and has market strength. Some of those, offer some high yield dividends. The yield is the measurement of the profit you will receive in the dividend.

Conversely, companies that are expanding quickly may typically not make dividend payments. This is because, it's only economically wise to reinvest their profits into operation during the growth phase instead of paying investors.

On the other hand, some financially stable and established companies also do not pay dividends. They often reinvest their earning to fund new initiates, acquire other companies, or pay their debt. Investors with shares in such companies can only sell off their spot share to make profits.

The choice not to pay investors dividends is peculiar to different companies, and reasons are best known to its management. Here are a few reason why companies may decide not to pay dividends to investors.

Young companies

Start up dividends

Companies that are not yet mature in the market and are in the process of expansion use all their profits to grow the company, so they do not pay dividends. These companies focus on increasing the value of their shares, so investors who buy these shares bet on their capital gain in the long term.

This implies that the fact that a company does not distribute dividends does not lack solidity, but focuses on the growth of the brand to position itself better in the market. In other words, a company may not pay these benefits and still be an excellent long-term investment.

This mainly depend on what is done with the retained profit, if the company wants to increase its long-term value, it must develop profitable investment projects, with positive NPV. Obtaining higher profitability than what an investor could obtain on average in the market.

Reinvestment of all profits

It may also happen that the company has economic maturity, but focuses on the reinvestment of its earnings to offer its shareholders higher returns in the future. The best example of a current company with a reinvestment policy that adds value to the company would be Berkshire Hathaway, led by Warren Buffett, increasing by 19.9% compounded in the last 40 years, thanks to good investment decisions.

The same example would be the case of Microsoft, or any large tech company, which have shown an annualized historical return of over 15% and do not distribute dividends.

Financial problems

companies with no dividends

Another reason why some companies do not pay dividends is because they have had to take the measure to eliminate, suspend, or decrease them. This situation can occur due to a negative hit on their balance sheet, like what happened to many companies during the pandemic.

However, companies that have historically presented good dividends, and now suddenly stop distributing them, should be very careful with this type of practices, as this could end up driving away the investors who are still inside.

Advantages and disadvantages of not distributing dividends

Not distributing dividends has it pros and cons, it all depend on the investor's investment method and the reason for the investment. Here is a list of the advantages and disadvantages of not distributing company's dividends.

Advantages of NOT distributing dividendsDisadvantages of NOT distributing dividends
Allows reinvestment of profits❌ Many shareholders might not find it attractive
Faster growth❌ Companies that may present high volatilities.
The shareholder can defer taxes, until the time of the sale and pay tax on the capital gain. 

👉 Learn about dividend aristocrat: Top 10 dividend aristocrat: the path to steady return

10 companies that do not pay dividends

Below are 10 examples of companies that do not pay dividends to shareholders. As can be seen, these are high-tech development companies and very recognized worldwide, more focused on capitalizing as quickly as possible, to continue growing:

Why do people buy shares of stock companies that pay no dividends?

This decision will be determined by three factors:

  • The time horizon.
  • The amount available to invest.
  • When they are well managed, that is, they obtain positive NPVs from their investments.

If the investment is made in the short term, it is possible that the capital gains obtained as a result of this reinvestment may not be perceived, and therefore we prefer to obtain the dividend ensuring that return. In the case of being long term, the increase would occur and could be more profitable.

And finally we will choose companies that do not distribute dividends, as long as the investments they make with the retained profits add value, you trust in the sector, and in its management team, many times this part goes unnoticed, but it is what the company depends on, the part that makes the decisions, and therefore, on which the course of the company in question depends.

In short, these are the reasons why many companies decide not to pay dividends. Should you reconsider changing your investment strategy regarding dividends?

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FAQs about Companies that do not pay Dividends

Why a company doesn't pay dividends?

Companies in the growth stage rarely pay dividends. In fact, many of these companies are not even profitable yet. They are focused on acquisitions, expansion, product development and all of these other things that cost a lot of money. As a result, they simply cannot afford to pay a dividend.

How do you know if a company pays dividends?

Several stock brokerages offer their customers screening tools that help them find information on dividend-paying stocks. Investors can also find dividend information on the Financial Commission Authority's (FCA) website, through specialty providers, and through the stock exchanges themselves.

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