What Does It Mean if a Stock Doesn't Pay Dividends?

by Chris Joseph

Dividends are a portion of a corporation's earnings that it pays to its shareholders. A company's board of directors may issue dividends on a quarterly basis, although smaller companies may do so annually. While companies typically issue dividends to appease its shareholders, it is under no obligation to do so. Companies may choose not to pay dividends on its stock for a number of reasons.

Growth Focus

If a stock does not pay dividends, it could be a sign that the issuing company is focusing on growth. Rather than issuing dividends to its shareholders, the company's board of directors and top management may elect to reinvest the earnings into the company to finance expansion or acquire other businesses. The company may view this as a more viable alternative than taking on additional debt to finance growth, as it poses less of a risk than borrowing money.

Security and Flexibility.

Companies may elect not to issue dividends to provide an added measure of security. One reason Apple Computers has traditionally chosen not to pay dividends is so the company can maintain a financial cushion for protection during difficult economic times. The extra cash on hand also provides additional flexibility to make acquisitions quickly without having to find ways to generate additional investment capital or take on debt.

Investment Expertise

Some stocks may not pay dividends because company management may believe that it can do better for its shareholders in the form of increasing stock prices. Companies such as Berkshire Hathaway possess the investment expertise and proven track record to produce a higher return on investment for shareholders. Issuing dividends only serves to reduce the amount of profitable investment dollars.

Financial Problems

Stocks that traditionally had paid dividends but no longer do so could indicate that the company is experiencing financial difficulties. The company may stop paying dividends simply because it can no longer afford to do so. For example, Citigroup and Ford Motor Company stopped paying dividends as a result of the economic downturn in 2008 and 2009. Some companies may choose to resume paying dividends as its financial health improves.

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