Question

1. Please explain the return of a stockholder assuming first the stock pays stable dividends with zero or positive growth rates

2. Next, assume another stock that pays no dividend now and has no intention to pay any dividends in the future.

3. Also, please discuss why one will buy a stock that pays no cash dividends.

thank you

Answer 1

1. Return of a stock holder will always be constant in nature of a company which is paying dividend with zero growth because when there will be no growth, then the dividend payout ratio will be constant, then the realization is in the form of dividend payment to the stock holder with always be uniform.

Investor will also be having unrealized gains in the form of capital appreciation.

2. Stock which is paying no dividend as of now but it has no intention to pay any dividend in future than those investors who are investing in such company will be gaining through only the capital appreciation and these capital appreciation will be helping the investor in the form of compounding of Return and the company will be trying to re invest into its profit rather than distribution of dividend.

3. stock that will pay no cash dividend will be preferring to invest their profits back into the business so these company will be rewarding investors in form of the capital appreciation.

So even if there is no payment of cash dividend to investors, investors will still be gaining through capital appreciation in the long run and they can compound their rate of return.