Why Invest in Stocks That Don’t Pay Dividends

  • 4 minute read

What Are Dividends?

Every three months, a company pays its shareholders in the form of dividends. These payments are usually made in cash, but they can also be made in the form of stock. Dividends are a way for a company to give a portion of its profits to its shareholders. They are usually paid out of the company’s profits. The number of dividends paid out can vary depending on the company’s performance and financial situation. Some companies pay a consistent dividend, while others increase or decrease the number of dividends paid out over time. Dividends are highly regarding but sometimes we have to ask ourselves: why invest in stocks that don’t pay dividends?

Examples of Dividend Paying Stocks

Examples of dividend-paying stocks include:

  • Johnson & Johnson (JNJ) is a healthcare company that has paid dividends consistently for over 60 years.
  • Procter & Gamble (PG) is a consumer goods company that has paid dividends for over 125 years.
  • Coca-Cola (KO) is a beverage company that has paid dividends for over 90 years.
  • General Electric (GE) is an industrial company that has paid dividends for over 100 years.
  • AT&T (T) is a telecommunications company that has paid dividends for over 30 years.

Johnson and Johnson - How to buy stocks

It’s worth noting that these are just a few examples of companies that pay dividends, and it’s always a good idea to thoroughly research any stock before investing. Some companies may have a history of paying dividends but may cut or suspend them due to financial difficulties. It’s always important to keep an eye on the company’s financials and dividends history before making an investment decision.

Examples of Non-Dividend Paying Stocks

Non-dividend-paying stocks can be found in various industries, including technology, e-commerce, and biotechnology/pharmaceuticals.

Companies such as Facebook (META), Apple (APL), Google (GOOG), Amazon (AMZN), Alibaba (BABA), Moderna (MRNA), and Gilead Sciences (GILD) prioritize reinvesting profits to drive growth and expansion rather than distributing dividends to shareholders.

Big Tech Stocks | FANG Stocks | why invest in stocks that don't pay dividends

4 Reasons To Invest in Stocks That Don’t Pay Dividends

Investing in stocks is a common way for individuals to grow their wealth over time. One of the key factors to consider when investing in stocks is whether or not the company pays dividends. Dividends are payments made by a company to its shareholders, typically on a quarterly or annual basis. However, not all companies pay dividends, and there are several reasons why an investor may choose to invest in stocks that don’t pay dividends.

1. Potential for Capital Appreciation

Capital appreciation refers to the increase in the value of an investment over time. When a company does not pay dividends, it often uses its profits to reinvest in the business, which can lead to growth and increased value for shareholders.

For example, a company that is investing in research and development or expanding into new markets may not have the resources to pay dividends, but the potential for future growth can make the stock a good investment. This is particularly attractive to long-term investors who are looking to benefit from the future growth of the company rather than the current dividend payments.

2. Tax Savings

Dividends are taxed as ordinary income, which can be a significant burden for investors in higher tax brackets. In the United States, for example, dividends are taxed at the same rate as the individual’s income tax bracket. This means that if an individual is in the highest income tax bracket of 37%, dividends are also taxed at 37%. In contrast, capital gains, which are the profits made from selling a stock at a higher price than it was purchased for, are taxed at a lower rate, typically between 0-20%.

This can make stocks that don’t pay dividends a more attractive option for investors who are looking to minimize their tax liability and keep more of their returns. Different countries have different taxation rates for dividends and capital gains, so it’s important to understand the tax laws and regulations of the country where you are investing in.

3. Potential for Future Growth

Companies that forgo paying dividends are often in the nascent stages of growth or are still in the expansion phase. These companies may not have the same level of financial stability as established firms that distribute dividends, but they maintain a greater potential for future growth.

Investing in these types of companies can be considered more speculative, yet the potential returns can be substantial, as these firms are channeling their profits back into the business to fuel expansionary initiatives such as research and development, entering new markets, or acquiring other firms.

Dividend Stocks Versus Growth Stocks In 2022 | Which Is Better?

These investments can lead to increased revenue and profitability for the company in the long term, which can translate into a higher stock price for shareholders. However, it’s crucial to note that investing in these types of companies is considered a higher risk as they are not as established and may not have a proven track record of success.

4. Diversification Benefits

Diversification is a vital strategy for investors, especially when it comes to balancing dividend-paying and non-dividend-paying companies. Incorporating a diverse set of companies in a portfolio that encompasses both types of firms can help to spread risk across different industries and sectors, thus reducing the overall risk of the investment.

Dividend-paying companies, such as utility or consumer goods firms, tend to be financially stable and provide a steady flow of income to shareholders. This stability can act as a buffer during market downturns. On the other hand, non-dividend paying firms, such as technology or biotechnology companies, are often in the growth phase, and their stock prices can fluctuate dramatically. Investing in these types of companies can provide higher returns but also carries a higher level of risk.

By including a blend of both types of companies in a portfolio, an investor can balance the stability and income provided by dividend-paying companies with the potential for higher returns provided by non-dividend-paying companies. This can help to reduce the overall risk of the portfolio while still providing the opportunity for growth.

Balanced and Cautious Approach

In conclusion, investing in stocks that don’t pay dividends can be a good idea for several reasons. Companies that don’t pay dividends often use their profits to reinvest in the business, which can lead to growth and increased value for shareholders. These stocks may offer tax savings, the potential for future growth, and diversification benefits. As with any investment, it is important to conduct thorough research and understand the risks before making any investment decisions.