I understand that a share of stock represents a share of ownership in a company. But if dividends are not paid, what is the actual value of that stock? Why does it have value? The company making more money does not flow to me because I own the stock. So is it basically just like owning a baseball card in that if the player (company) does well more people want to collect (own) their cards (stock) and this the price goes up?
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You own a claim to all the resources the firm owns – its physical property, its book of business, its brand, its IP, etc. and the firm’s ability to use those resources profitably.
That stuff is valuable and it’s what truly underlies the value of stock, whether or not it pays dividends.
As far as I understand, the value of a share comes as you said from the dividend but also from (hopefully) increased value. Let’s say, you bought a share of 100$ but after a year, the same share would cost 200$. This value becomes real when you sell. Reference: Wolf of Wallstreet.
The shares can still go up in value as the overall company valuation goes up. You can sell your shares for more than you paid, or the company might get acquired and you’d get paid out for your shares. Companies may also start paying dividends in the future once they hit a certain level of growth that’s self sustaining and they don’t need to keep re-investing profits to grow the business.
Owning a portion of something with value has value. If you have 50% plus one share then you can control what the company does, and that includes liquidating its value into cash paid to the stockholders.
Imagine there is a game at a fairground where every visitor gets handed a random ticket. Ten of those tickets are randomly selected and if someone turns in all ten tickets they get $100. How much is each ticket worth? They are worth $10 each even though you can’t turn them in individually. You need all 10 to get the $100.
Suppose instead you figured “Hey, I have a ticket but I can’t turn it into cash on its own. Therefore I don’t see it as having value.” If I then came along and offered you $1 for your worthless ticket that would seem like a good deal, right? But if everyone with a ticket used this same reasoning then I could buy up all ten tickets for $10 and claim the $100, making $90 in profit! So obviously each ticket is worth $10 on its own, the same as the stock is worth its proportional fraction of the total company value even if you don’t get paid dividends or liquidate the company.
Dividends aren’t important. Your premise is often repeated by people just learning about the market is a general indication that some bigger concepts need to be explained. Dividends by many people learning the market seem like the best thing ever, but they aren’t important. I’ll explain a bit why this doesn’t matter for most people (there are cases it does and it has to do with taxes and insider trading, but thats out of scope).
Dividends are essentially a *forced* sale of stock. When dividends are paid, the stock drops exactly by that amount. Its basically the same as selling stock, but you get no say in it.
For example. Your stock is worth $100 and you have 100 shares. That is you have a value of $10,000. Say a dividend pays $1 per share. You now have $100 in the bank ($1 for each of the 100 shares you own) and each share you have is now worth $99 each, since the price decrease by $1/share/ You know have $9900 in stock + $100 in bank = $10,000 nothing has changed in the overall dollar value for you. You just have a lower value of stock and $100 in the bank
Basically this is as if you sold 1 of 100 your shares at $100. But you didn’t’ have a choice, the company forced you to sell it. What if you didn’t want to sell it?
The stock does not pay dividends *today*. But it is generally expected to *eventually* pay dividends.
Historically, it is common for companies to start with no dividends during a “growth phase”, then (assuming they don’t fail outright) for them to finish “growth” and enter a “stable” period. During the “stable” period they begin to pay out dividends to stock owners.
There are also other types of payouts that aren’t called “dividends” but function similarly – stock buybacks, for example, are larger lump-sum payouts instead of ongoing smaller payouts.
For reference on how common this is: of the S&P 500 – the “top” 500 companies by a certain standard measure – nearly 400 pay dividends.
The company might not pay dividends now, but that does not mean it will never pay dividends in the future. That is up to the future majority shareholders to decide. There are also other ways for a company to pay out cash, for example the shareholders can vote on a stock buyback program where the company will buy shares from the shareholders. This allows the shareholders to decide for themselves if they want cash or continue to own the company. And if the company is dissolved for some reason other then running out of equity the shareholders all get their share of the remaining value.
A lot of other people here are talking about “company value,” company value comes from ability to pay dividends so those answers are kind of a cop out. But you are right, it all comes back to dividends, however not necessarily paying them.
Share price is based on the ABILITY to pay dividends and being able to pay those eventually, not the dividends actually right now. That “company value” can at any time be turned into dividends should the shareholders choose to do so by selling those assets off and distributing the proceeds as a special dividend, so the company is in other words “backed” by these assets. Income is the second way companies have value, profits could also be reinvested in the company to increase future profits/dividends and this itself increases share price as potential future dividends rise.
Usually investors are perfectly happy if share price rises instead of getting a dividend, in fact its often better for tax reasons. So it works out for them too. A company can of course fail before it pays any dividends at all but once again its the ability to at any given time which gives the shares these values.
>But if dividends are not paid, what is the actual value of that stock?
Where else are you going to put your money?
This is the thing people have to appreciate about investments: There are, in point of fact, a limited number of places you can put your cash which will give you a dividend or annuity.
The reason AMZN doesn’t pay dividends is not because it isn’t profitable, but because their board of directors and corporate leadership have agreed that reinvesting their profits into future growth is a better use of that money, in their role as fiduciaries on behalf of the stockholders.
Also, they *have* indirectly paid money to their shareholders, in the form of buybacks. Why buybacks? Because dividends are taxed immediately, and stock buybacks are taxed when the shareholder chooses to sell.
How do you know what a company is worth? If you can answer that question consistently and accurately, you can make a **SHITLOAD** of money on the stock market.
Companies pay employees with shares. In order to do so, the company must occasionally buy them back. If the company is doing well financially, they have more money to buy them back, and thus, the market demands a higher price for them.
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