I don't know that much about economics. But the notion that companies usually don't pay dividends is very confusing to me. I guess investors would rather see the money reinvested in the company to make the share price go up than receive dividends. But is this short-sighted? In the long run, how many companies actually pay out more to investors than they receive in investments? Because, if the companies don't pay out more than they receive, then investors, as a collective, are losing money. Considering the risk that comes with investment, it seems fair to say that over their lifetimes, companies should pay out much more to investors than they receive from them to make that risk worthwhile. Is that the case? Because, if it isn't, then investors are letting themselves be played for fools.
Companies that aren't new that don't pay dividends see that fact reflected in their stock prices. Many companies will almost always pay a dividend, otherwise people lose faith in their stock. Now, a lot of start ups don't pay dividends, but this is expected by the market. People buy these stocks anyway because they expect the future earnings to make up for not getting dividends in the present.
Investors prefer companies reinvest for 2 main reasons 1. If a company sees better value in paying dividends than reinvestment then their growth cycle is questioned. While a company is hrowing quickly investors are prepared to give it higher multiples on profits. 2. Dividends get taxed, growth in the share prices doesnt - until you sell.
you have to know a helluva lot about the market and individual companies, you have to have a lot of money that you can just sit on, and by that, I mean about a million $, while you look for (rare) real likelihood of major profits, likely enough to make it worth investing 100k or more at a time, in any one stock. otherwise, taxes and inflation just eat up your profits, making the risk not worth it. If you can't AVERAGE at least 20% per year returns, it's just not worth the hassle of personal investment. there's too many ways to PASSIVELY make a (much safer) 10%
It is difficult for beginners to manage a diversified portfolio for the reasons you state in your first sentence, however, index funds and TRFs make it much simpler. The stock market, during the 20th century, returned in excess of 10%. That through umpteen recessions AND the great depression. Expecting a nominal 10% return going forward over the LONG TERM is not unreasonable. A young investor that can squirrel away $200/mo over 50 years will retire a millionaire at a 7.5% return. That's 50 bucks a week to realize a 'retire-rich' goal. And to RETIRE rich should be EVERYONE'S goal. My advice to young people I talk to is to open a TRF, pick a retirement date, and dump every extra penny they can scrape up into it. A young person can mow 1 yard every saturday and retire a millionaire. A young person can NOT SMOKE CIGARETTES and use the saved money to retire a millionaire.
no, he won't. You are leaving out the effect of 5% average annual income, which means that 7% return is NOTHING (after taxes are removed) All you will be doing is keeping up with inflation. Don't fall for this sucker play, folks.
living in the truck basically, being an owner operator, and living in an old van when "home". After 3 years, take your 100k after tax savings, hook up with one or more veterans in the right area to buy huge old houses for tax sales, using the veteran's home loan to replace the cash you have to outlay, so as to swiftly get your money back on the house. rent the place out to 20 or more people, by the week and it will pay for itself in one year (if you "tend" it personally. Then, because you know what the biz is like, you can install the vet as the "live in" manager and you move on to the next place, In well under 10 years (counting the truck driving), you will have 200k per year of after tax income, and all you'll be doing is checking on the managment company which checks on your managers and property.. To hell with that beating your head against the wall for 50 years stuff. JB Hunt and others will pay for your truck training. What they do is cought up the 5k, sign you a contract, and beat you out of 20k per year that first year, compared to what you should have been making as a driver for them.
Even if the company does not pay dividends, the company still has inherent value to the shareholders. Eventually a private equity firm could come along and buy out all the stockholders so they could either liquefy the company, or turn it around and put it under new leadership. Theoretically the value of stock is entirely dependent on the amount of profit the holder of that stock can actually expect to receive in the future. However, it could also be possible the value of stocks has been chronically overvalued, in which case the stock market could indeed be a sort of long-term "scam", depending on how you want to think of it. There is a theory out there that stock has evolved into a new form of money, analogous to gold, where the accepted value has become greater than the inherent worth. This is possible because the assets and profits of the corporation are still limited, even if the stockholders will not actually receive any of those profits.
While true (shareholders of the company being bought out almost always make out better than the shareholders of the company doing the takeover; some times due to defense mechanisms), stockholders shouldn't depend on this. Theoretically the value of stock is entirely dependent on the amount of profit the holder of that stock can actually expect to receive in the future. Which is basically the market correcting itself. Also this can cause bubbles. While it's not good for retirees and near retirees, it can represent a wonderful opportunity for the bold. Even though pretty much everybody knows it's best to buy when low and sell when high, it generally works in an opposite manner. This is due to human irrationality and those who think more logically are able to take advantage of this. Stock and gold are both valued due to "perceived value." The market will eventually correct itself though if the stock becomes overvalued. Human irrationality plays a big part in this overvaluing. Generally, stockholders won't receive any value initially from start-up investments, but they project future growth and earnings. Reading the 10-k's and 8-k's are something I consider to be valuable alongside research into the company and industry in order to get a more accurate reading into the company. For those that don't know, using EDGAR can be very valuable into researching companies. Not only for the financial statements, but also for the Management Discussion and Analysis. I will say I tend to be wary of long-time companies that don't almost always pay dividends, but there are exceptions to every rule, and some times it is best to look at companies on a case by case basis, and to look at external causes to explain decrease in earnings.
Companies issue stock to raise money. Investors buy stock believing they will make money when the company grows because of better, more competitive products and services. If the company is managed well, the company grows and each share of stock owned by investors is worth more. Dividends are a small part of why investors buy stock. It's not a scam. It is like gambling because no one knows the future, but the odds are not prefigured against you like in a casino. If a person doesn't want to learn about companies and keep up with what is going on with the economy, the best investment is an index fund that follows the S&P 500 largest companies in America. Most of the time, the index will grow or fall with the whole economy.
first you have to have SOME money to "divirsify. Beginners have no CHOICE but to have nearly all their money in one (proven as it goes) highly profitable "game". Then, later, when they have a million $ or so, yes, it's good to protect it with diversity, part of that diversity being survivalist type education and goodies, as well as gold coins. Divesify too soon, tho and you'll never get your million, nor anything like that much money.
I think the point of the question was why investors would want to buy stock if the future dividends expected to be received would not be worth it. If you are just saying it is worth something because they can sell it to someone else, that would really be like circular logic. No, eventually someone who buys the stock is expecting to make money off it (and I'm not just talking about selling the stock to someone else). I have thought about this the same way with tree farming. High quality wood requires trees that take many decades to grow, often longer than a single person's lifetime. What incentive is there for a business owner to start farming trees now? Well, he can sell his forest to someone else, who can later sell to another investor, who in turn can finally sell to another business owner (100 years later) who can finally harvest the wood and sell it. The forest wood increases in value as the trees approach the maturity date.
some stocks go up dramatically in one day, so dividends can be unneccessary to make an investment worth it
The stocks only go up dramatically because expectations about the future suddenly change. A more valuable company has the potential to give out more dividends in the future. It might not issue dividends while you hold the stock, but the next investor to buy that stock from you has the expectation of seeing dividends. When there is a hugely profitable company whose management both is not growing the company and refuses to pay dividends, the market price of that stock will start to go down. That's when a private equity firm could try to swoop in and kick out the management, to be able to milk the company for what it's worth.
dividends almost never meet the 6% (before tax) average annual inflation rate in the US, so they are nothing upon which to base your decision (to buy or keep a stock) If you can't average 20% per year in the stock market, you are either not trying or you better get out of it, cause you don't know what you;'re doing. I prefer the safer, much higher returns of weekly room rental buildings, myself. 30%+ per year ROI is what I aim for and normally, get. If you have just one place and run it yourself, the ROI can be over 100% per year, but that's not calculating your salary as separate from the return on investment.
It's not circular logic because the company grows, makes more profit, has more assets, etc. And It is worth more. Apple is worth a lot more now than it was 20 years ago because of the products it has produced, the services it created, how well managed it is, and the assets it has accumulated. Very few people buy a stock primarily for the dividend. That is just not the psychology of most investors. With a good company, unlike trees, money can be and is harvested every year. That is part of what an investor looks at.
So the economy grows at 3% annually but the stock market grows at 10% annually AND THIS CAN CONTINUE FOREVER? What happens when the stock market is worth a million times more than the economy? Do you see the problem?
Stocks are valued entirely by how people think the stock is worth. It is all about perception. I am not sure why you think that is a scam, though.
Obviously! Even though professional fund managers don't outperform the market and most of their asset weighted returns are less than 10%, you CLEARLY should expect to earn a return of 20% on average per year.
The stock market is much more volatile than GDP - which means that it can grow at a faster rate during some periods, it can also decline at a faster rate in others. If you consider stock market returns from 1925 all the way to today, you'll probably find average annual returns to be around 6% at most. Definitely not the 10% you claim.
A lot of companies do. And whether or not dividends are a good thing or bad thing depends on the investor and their investment objectives, their horizon, and their risk profile. I see people discussing the merits of companies paying dividends and how that benefits investors. It's a nonsense debate to have, because it's different for every individual. Someone whose goal is capital appreciation will obviously look to invest in companies that retain their cash and reinvest in the company. Others, whose goal is a steady income (usually older individuals) will prefer to receive dividends.
