Question

Google stock rose from $208 at year-end 2005 to $770 per share at year-end 2015. Google has made sizable profits but never paid a dividend. Why were people willing to pay such a high price knowing that they might not get dividends for many years?

Answer 1

So if a company invests in itself to grow its profits higher and higher, one of the main reasons investors will buy the shares, is in the expectation of future capital gains. People buy stocks because there is more to Return on Investment than whether dividends are issued or not.

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.