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The question is relate to If a stock doesn't pay dividends, then why is the stock worth anything?

And I have something what to add to know more about it.

As a baseline, I should state that I understand that buy stock of a company, I can own one fraction of the company, and can make money if somebody want to buy it with higher price.

But my question is below:

  1. As a small investor, just own less than millions of company, my right was already represent by some big investor, of course I cannot find out which part of the company really belongs to me.
  2. While the company became big, return to 1, I still cannot get any part of the company.
  3. If the company will never pay dividend, the only time I can take part of the company back is while the company go to bankruptcy, maybe can get hundred of stock value or even zero from the company.

So on the earth, what do we really can get from the company if it never pay dividend? Maybe just confidence that the company will go bigger which technically not link to small investor.

It seems I had not expressed my idea clearly.

Let's make an analogy.

Assume there is a company which really did not have any business, and assume it have very good market so that nobody knows its real business value but anybody believe he did well.

And every year, it can provide an amazing financial report, so everybody like to buy its stock, and the price increased to a very high price. And it did not pay any dividend.

The question is is there any difference for the company with other real company who did not pay dividend from the small investor's view?

Justin
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    I tried to clarify the question some through copy editing, but it's still Really Confusing. (No matter how many shares you own, when the company does not pay a dividend, you get "something" by buying shares at a lower price than what you sell them at...) – RonJohn Dec 16 '20 at 18:09
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    I think the answer is still found in the answer you linked, just not as explicitly - the hope is that someone buys your share for a higher price because eventually they will get a dividend, or the company will get bought or otherwise liquidated. – D Stanley Dec 16 '20 at 18:10
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    what do you mean by "technically not link to small investor"? Even .000001% of a company doubles if the value of the company doubles.. – D Stanley Dec 16 '20 at 18:11
  • You get the chance to sell it to someone who wants to acquire 100% of the company, in the future. They can't get 100% without buying your piece. – user253751 Dec 16 '20 at 18:12
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    What do you really get if you buy buy a stock of a company which PAYS a dividend? If received in a non sheltered account, you get to pay taxes on your dividend, assuming that you make enough to owe taxes. While taxed as income, dividends are not true income. They produce ZERO total return. Read this. – Bob Baerker Dec 16 '20 at 18:16
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    @BobBaerker The explanation of why dividends don't produce return assumes that the stock price reflects something sensible. Which is basically what this question is asking. – user253751 Dec 17 '20 at 17:21
  • @user253751 - You can make any assumptions that you want or even none if you choose to. Regardless of your choice, it's a simple fact that a dividend provides ZERO total return, if not negative if received in a non sheltered account. Stock exchanges reduce share price by the EXACT amount of the dividend on the ex-dividend date. – Bob Baerker Dec 17 '20 at 17:32
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    @BobBaerker sure, it's a fact, but the explanation is meaningless if you don't first explain why the value of shares is based on something sensible. – user253751 Dec 17 '20 at 17:34
  • Read the the first sentence of the OP's question and then see if you can figure out his implication about dividend paying stocks. If not then c'est la vie, c'est la guerre, c'est no more. – Bob Baerker Dec 17 '20 at 17:43

4 Answers4

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Basically, by owning that share, corporate law protects the fact that you own the stated % value of the equity of a company.

Companies decide whether to pay dividends, basically, on what the shareholders want. This means that, basically, if the company has profitable projects that it could use its cash on, it won't pay out dividends, and instead it will invest in itself. If a company has excess cash, it will often pay it out as dividends. As a tiny investor, your vote on the Board of Director selection is meaningless, but corporate law protects you from being cheated out of value by the bigger shareholders, so as long as nothing fishy is going on, that means you can basically 'trust' that the company is being run with the best interests of the shareholders (including you) at heart.

So if a company isn't paying dividends, there is a reason. Maybe it is a junior mining company, and won't pay dividends until it strikes copper at a minesite, and can comfortably produce it without massive capital investment.

Why your share holds value is that under corporate law you own a % of the company. You can't walk up to the gates and point out the door you bought with your $100, but if money goes out to shareholders, you will get a piece of it. This could be from future dividends when the company is ready to pay them, or it could be from bankruptcy (probably you won't get much in this case), or if it gets bought out by a larger company (you would get a cash payout or shares in the larger company, depending on the terms of the agreement), or even under liquidation by choice (which is somewhat common for small private companies, but pretty rare for public companies).

In the meantime, if you have the ability to sell your shares in the company through a public stock exchange, you can 'cash out' your value before that future dividend-type payment occurs. This only has value because of the above - basically someone down the line is getting a cash payment from the company itself, and trust in that fact allows the shares to get traded, even by people who might only buy and sell the shares over the course of a day. Be warned - if a company performs poorly, its stock price will drop, so this is not a guarantee that you will get a profit, or even that you will get any money back.

Grade 'Eh' Bacon
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As a small investor, just own less than millions of company, my right was already represent by some big investor, of course I cannot find out which part of the company really belongs to me.

You don't own any particular bit of the company. You can't go into the factory and say "that machine's mine". Instead, you own a share of the whole company.

While the company became big, return to 1, I still cannot get any part of the company.

You can't ever get any particular bit of the company. The only thing you can do is to sell the shares.

If the company will never pay dividend, the only time I can take part of the company back is while the company go to bankruptcy, maybe can get hundred of stock value or even zero from the company.

You get money by selling your shares. If the company has been reinvesting all its profits, instead of paying dividends, then you hope that your shares are worth more when you sell them than when you bought them.

Suppose there is a company that has 1,000,000 shares and the company is worth $1,000,000. Suppose you have 100 of those shares. You can sell them to somebody for $100.

Suppose the company is well-run and it grows to $10,000,000. Your 100 shares are now worth $1,000. When you sell them, you make a profit.

The other time you may get a payout is if somebody wants to buy the whole company. As a shareholder, they have to buy out your shares.

If the company goes bankrupt, you will probably get nothing. The company is worth $0 and nobody wants your shares because they are worthless. Shareholders are the last in line to get paid out when the company winds up, and all its assets are sold. Everybody else that the company owes money to gets paid first. (If the company has enough money to pay out all its creditors, and still has money left over at the end, then it wasn't bankrupt in the first place.)

Simon B
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    Regarding the last paragraph, it could still have assets, and so not be worthless. Specialized production equipment, for instance. But yeah, owning a share of dead capital isn't likely to profit you much. Someone might purchase the assets whole-sale, but usually at a very depreciated cost - amusingly enough often just enough to cover the estate's lawyers. – Stian Dec 17 '20 at 10:32
  • I find the paragraph about buying/selling misleading. Unless the company has a standing offer to buy back any shares at the relevant fraction of the company worth you have no guarantee to get the right price for your shares. The market rate for the shares of the company is usually more then the physical value of the companies assets - but this all depends on you finding a willing buyer. If we are in a global crisis nobody might have spare money to buy your shares - this can drop the price below your invested money, even if the company "is woth more". – Falco Nov 24 '23 at 10:14
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It is completely normal to buy things, because, the thing will go up in price, even though, the thing pays absolutely no profits.

  • a house†
  • gold
  • wheat, oil
  • artworks
  • Alfa Romeos

The situation you describe is completely, totally, normal.

† Note too that houses have H U G E expenses, far less "never paying one cent in profit".

Fattie
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  • Why do these things go up in price? – user253751 Dec 18 '20 at 15:23
  • Because they are needed/wanted. – Fattie Dec 18 '20 at 16:02
  • Are they all just Ponzi schemes? – user253751 Dec 18 '20 at 16:13
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    Not so much ponzi, as just "everyone believes". User, you seem to be getting at the "deep meaning" of the nature of pricing and valuation. Let us phrase it this way: you have discovered, so to speak, that the epistemological basis of the " ' value ' " of Apple Shares is ... nothing. Absolutely nothing. Surprisingly, that is not a "big discovery", it's just how things are!! Note that - forget about shares - the US Dollar is nothing, whatsoever - literally - than a shared belief. (Currency runs happen all the time historically.) Regarding all this, you may enjoy reading up on game theory! – Fattie Dec 18 '20 at 16:17
  • Except the basis for shares isn't nothing. There is actually a sound basis to the value of company share. Sure, not everyone agrees on the exact value of that basis (which is why trading happens), but it still exists. – user253751 Dec 18 '20 at 16:20
  • There is absolutely no sound basis to company share prices - whatsoever. Absolutely nothing. There are a few (utterly vague / bizarre) theories, such as "it has something to do with profit". {Even in that example, it's something incoherent like "the profit is X so we will, uh, pick a magic number, multiply, and that's the value! yeah!"} – Fattie Dec 18 '20 at 16:22
  • Just BTW, pls note that it's best to avoid long discussions in comments - or the mods will boot ya! :) – Fattie Dec 18 '20 at 16:24
  • Other answers have stated the basis: bankruptcy; takeover; future dividends; dismantling the company and selling its assets. – user253751 Dec 18 '20 at 16:27
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To retort your analogy (too long for a comment):

Assume there is a company which really did not have any business, and assume it have very good market so that nobody knows its real business value but anybody believe he did well.

And every year, it can provide an amazing financial report, so everybody like to buy its stock, and the price increased to a very high price. And it did not pay any dividend.

The question is is there any difference for the company with other real company who did not pay dividend from the small investor's view?

Where is this "amazing financial report" coming from? If this is a publicly traded company, the report much be audited to verify its accuracy, so lying is not an option. The results in this "amazing" report must have come from somewhere. It can't easily be fabricated. I'm not saying that fraud never occurs, but I don't think a fraudulent example proves your point.

As the other answers have stated, the financial value of a company is based on either its net assets or the present value of its future cash flows (whichever is greater). The stock represents a percentage of ownership of that value. Yes, if the company does not pay a dividend that value is embedded in the company, so the only other way (besides a merger, acquisition, or liquidation) you can profit from that stock is if someone else buys it from you, hoping that they will eventually get a dividend of get bought out. The price that they buy it for would be based on the current value of the company, so your stock still grows in value as the company grows in value.

If the company will never pay dividend, the only time I can take part of the company back is while the company go to bankruptcy, maybe can get hundred of stock value or even zero from the company.

Not true. The company could get acquired or be part of a merger. The value that you get for your stock should be based on what the company gets acquired for. It ma be in all cash, or in the stock of another company, in which case the same arguments apply. It can also buy back its own stock from you, which again is based on the value of the company.

D Stanley
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  • Can you explain why anyone should pay for "value embedded in a company"? What use is it? – user253751 Dec 18 '20 at 15:23
  • @user253751 I don't know how else to say it that hasn't already been said. The value is the hope that someone else will buy it for a higher price (for all the same reasons). That may seem abstract and arbitrary, but the fact that it happens millions of times a day makes it a reality to me. – D Stanley Dec 18 '20 at 15:53
  • It needs a base case or else it's just a Ponzi scheme. – user253751 Dec 18 '20 at 16:14
  • A ponzi scheme is different, and superficial. The base epistemological value of "a share cert" is that others will buy it. There is nothing else. Your "discovery" that they are actually valueless is not a reason to turn away from such parts of life, but rather, a reason to embrace that you now know how it works and profit from it. – Fattie Dec 18 '20 at 16:20
  • The "base case" is the claim to the market value of the net assets. (I use quotes because I don't see it as an inductive proof). If I form a company that just holds $1,000 in cash and does nothing else, how much is your 1% claim worth? Yes some things outside of your control have to happen for you to get that 1% back in cash, but those things happen all the time. It's possible that a company never pays dividends and eventually goes bankrupt, but that's not the only possible conclusion. The probability that the other things happen (dividends, sale, liquidation) is what gives stock its value. – D Stanley Dec 18 '20 at 16:20
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    @user253751 I feel like you're making "rhetorical" comments to try and improve answers using the Socratic Method. While that is a good approach, I'm afraid it doesn't read that way in this forum (questioning comments are more often taken as disagreements/criticisms than as introspection). I'd suggest a different approach or your own answer if you have a different view. – D Stanley Dec 18 '20 at 16:25
  • { that was incredibly astute for this early in the morning !! :O :O } – Fattie Dec 18 '20 at 16:25
  • A share doesn't give you a claim to the market value of the net assets. I can't walk up to a company and say, hey, your net assets are $10000000, here's $1000 of shares, give me $1000 of assets. – user253751 Dec 18 '20 at 16:26
  • Right - as I said, some things have to happen outside of your control to realize it, but those things happen all the time, and always legally protect your claim. – D Stanley Dec 18 '20 at 16:27
  • And to continue your analogy, you can go to someone else and ask "what would you pay me for this claim on $1000 of this company's assets?" That happens even more often. – D Stanley Dec 18 '20 at 16:29