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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It has value because it has growth potential – and a business’ aim is to maximise growth.
The company itself was profitable – dividend or not. The dividend is actually just the money going out the door, and so is useless to the company: even if the investor reinvested the money, it wouldn’t go into operations.
When the money is instead retained, this is either to be stored as cash for reinvesting into making the company grow, or adapt – or else is money kept aside as protection against, for example, a recession. Or else to pay off debt.
Giving out dividends doesn’t help the above. Which is okay if the company is in a stable market environment, with shareholders focusing more on passive cashflow. But in a dynamic and competitive environment, a company can’t really afford to be stagnant.
And the better the survivability and competitiveness a company has, the better its future prospects versus other companies.
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