So Tell Me Again Why You Don’t Pay A Dividend?

In one respect the stock market has often baffled me. I understand what stock ownership in a private company means. And I even understand what stock ownership in a publicly traded low growth dividend earning stock means.

What I don’t understand is why a reasonably mature public stock that generates no dividend is worth anything to anybody. Ok that’s not quite true. I understand why a company might be strategic to another company and so, in that context, to have substantial value even if not producing revenue, or even profit. But owning a stock in the hope that someone else will see it as strategic ain’t no way to manage a portfolio.

In the tech market, most companies are considered “growth” stocks, and so do not pay a dividend. As the most insane and absurd example, Microsoft only felt it appropriate to start paying a dividend in 2003. In the case of a no-dividend company, what you are doing when you buy their stock is absolutely nothing more than gambling that some other guy is going to think, in the future, that the given stock has more value than you believe it does today, probably based on some nebulous metrics. But if your intent is to hold that stock for a long period of time, how are you getting a return on investment if there is no dividend? As I see it, investing in publicly traded mature stocks that don’t offer a dividend is the most pure (and ridiculous) form of gambling.

As I see it, the stock market ought to work a lot more like private stock ownership. If you own stock in a private company, unless you are in a massive early stage growth phase, the value in owning the stock is that it generates revenue for you. A dividend. This is no different than how you should feel as the holder of a relatively mature private company.

The reason I started thinking about this is I, like everyone else, have been wondering where the bottom of the market is. And in tech, i.e. growth stocks, I have been wondering how you select a bottom for companies that pay nothing to their shareholders.

I think one of the repercussions of this crash is that at all but the earliest stage companies will have to consider a dividend strategy that makes sense not just for the companies but for their shareholders and the stock market as a whole. This may be the only real way of re-establishing underlying value for equities.

Post Author: Ruby H. Rosenbaum

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