Question

Please discuss the return of a stock holder assuming first the stock pays stable dividends with zero or positive growth rates, and next, assume another stock that pays no dividend now and has no intention to pay any dividends in the future. Also discuss why one will buy a stock that pays no cash dividends.

Answer 1

The return of stock holder that pays stable dividends with 0 or =ve growth rates would be impacted o n account of -

1. The company needs to have the amount of dividend plus any applicable tax thereon in its liquid assets prior to disbursement of dividends.

2. There will less return on account of notional return loss on account of keeping such money in liquid assets.

3. Such stocks would be beneficial for shareholders preferring liquidity over growth (i.e requiring cash for catering to daily expenses) & by investing the dividend income over time the investors would have more shares which means more wealth appreciation.

4. Dividends are less volatile than earnings over time. so the firms that tend to issue dividends – even on the lower end of the credit rating scale – are generally established, cash-rich and can ride out tough markets.

5. Dividend income can be taxable in the hands of individual investors thus compromising their return too.

6. Companies that don't pay dividend invest as much into their growth and taking future expansion projects, acquire new projects, buyout/ take over other company.

7. If the rate of return in outside market is lesser than growth rate of company then money can stay invested with them and provide compounded returns in future. Further from investors point of view, the capital gain tax as compared to personal tax is lesser thus leading to more post tax returns to investor.

Companies like Facebook, Alphabet, Tesla do not pay dividends to shareholders.