There are many ways to value a stock without dividends. While dividends are the only money paid directly to shareholders, companies also have earnings that usually lead to capital gains for the stock. For stocks without dividends, earnings are often used to evaluate the company.
There is a great difference between a company with strong earnings that chooses not to pay a dividend and one that cannot afford to pay. However, even struggling companies usually have other assets that can be valued.
Key Takeaways
- There are many ways to value a stock without dividends.
- A company with high earnings and a low price will have a low P/E ratio regardless of dividends, and such a stock could be a good buy.
- Growth investors prefer to focus on metrics like earnings growth.
- The assets and liabilities of a firm can be summed to give the book value, and stocks priced below book value frequently perform well.
- Stocks without dividends can be excellent investments if they have low P/E ratios, strong earnings growth, or sell for below book value.
The P/E Ratio
The price-to-earnings ratio or P/E ratio is a popular metric for valuing stocks that works even when they have no dividends. Regardless of dividends, a company with high earnings and a low price will have a low P/E ratio. Value investors see such stocks as undervalued. A company with high earnings and a low price has the potential to convert those earnings into dividends, which gives it value.
Earnings Growth
Growth investors prefer to focus on metrics like year-over-year (YOY) earnings growth. Where earnings are going is more important to these investors than where they are right now. If a company's earnings went up 60% last year and 50% the year before, that is a sign the company is strong. If earnings keep declining, high dividends are just a bribe to buy and hold the stock of a company as it goes out of business.
Firms can make money without giving out dividends. Frequently, young and growing firms prefer to reinvest their earnings in their business instead of issuing dividends. That can also create tax advantages for investors. Dividends often qualify for low long-term capital gains tax rates. However, retained earnings and price appreciation do not require investors to pay any taxes until they sell the stock.
Book Value
Book value provides a way to value the stocks of companies that have no earnings and pay no dividends. Every company has assets and liabilities on its balance sheet that can be summed to give the book value of the company. Firms that are currently losing money and cannot pay dividends may see their stock prices fall below book value. At the very least, stocks priced below book value make tempting takeover targets.
The stocks of firms with long histories of success were often good buys when their prices fell below book value. They frequently returned to profitability later on, and their prices zoomed up far beyond their book values. Warren Buffett placed great emphasis on book value during most of his career. However, he became skeptical of its continued usefulness in his later years.
Reasons to Buy Stocks Without Dividends
In the past, many associated growth companies with non-dividend-paying stocks because their expansion expenses were close to or exceeded their net earnings. That is no longer the rule in today's modern market. Other firms have decided not to pay dividends under the principle that their reinvestment strategies will—through stock price appreciation—lead to greater returns for the investor.
Thus, investors who buy stocks that do not pay dividends prefer to see these companies reinvest their earnings to fund other projects. They hope these internal investments will yield higher returns via a rising stock price. Smaller companies are more likely to pursue these strategies. However, some large caps also decided not to pay dividends in the hopes that management can provide greater returns to shareholders through reinvestment.
A non-dividend paying company may also choose to use net profits to repurchase its shares in the open market in a share buyback.
Finally, there is book value. An unprofitable company with lots of assets may be priced below book value. When prestigious firms with long histories fall below their book values, they often rebound spectacularly.
FAQs
The price-to-earnings ratio or P/E ratio is a popular metric for valuing stocks that works even when they have no dividends. Regardless of dividends, a company with high earnings and a low price will have a low P/E ratio. Value investors see such stocks as undervalued.
What if a stock doesn't have a dividend? ›
Companies that offer dividends provide investors with a regular income as the stock price moves up and down in the market. Companies that don't offer dividends are typically reinvesting revenues into the growth of the company itself, which can eventually lead to greater increases in share price and value for investors.
How do you make money on a stock that doesn't pay dividends? ›
How do you make money from stocks that don't pay dividends? The two ways to profit from stock investing are capital gains and dividends. If dividends aren't an option with the stock, then your only profit potential is from capital gains.
Do all value stocks pay dividends? ›
Many value stocks pay out substantial amounts of cash as dividends to their shareholders. Because such businesses lack significant growth opportunities, they have to make their stock attractive in other ways. Paying out attractive dividend yields is one way to get investors to look at a stock.
Does Warren Buffett buy stocks without dividends? ›
Many wise investors believe that dividends are the key to long-term investing success. Warren Buffett certainly fits into that category. He doesn't make big bets on which way a stock will move over the next quarter or even the next year. Instead, he focuses on quality companies sustaining dividends.
How do you value a stock that pays no dividends? ›
The price-to-earnings ratio or P/E ratio is a popular metric for valuing stocks that works even when they have no dividends. Regardless of dividends, a company with high earnings and a low price will have a low P/E ratio. Value investors see such stocks as undervalued.
Why do stocks have value if they don't pay dividends? ›
Companies that do not pay dividends on their stock usually reinvest the money that would have gone to dividend payments towards the company's expansion and overall growth. This implies that their stock prices will rise in value over time.
What's the highest dividend-paying stock? ›
20 high-dividend stocks
| Company | Dividend Yield |
|---|
| Eagle Bancorp Inc (MD) (EGBN) | 8.96% |
| Altria Group Inc. (MO) | 8.90% |
| Washington Trust Bancorp, Inc. (WASH) | 8.79% |
| First Of Long Island Corp. (FLIC) | 8.72% |
17 more rows4 days ago
Zero-dividend preferred stock is preferred stock that does not pay out a dividend. Common stock is still subordinate to zero-dividend preferred stock. Zero-dividend preferred stock earns income from capital appreciation and may offer a one-time lump sum payment at the end of the investment term.
Is it illegal to not pay dividends? ›
Dividends are the payment of a corporation's profits to its shareholders. Payment of dividends are not mandatory; rather, the board of directors may use its discretion to decide whether to invest the company's profits back into the company pay them out in dividends.
Price-to-earnings ratio (P/E): Calculated by dividing the current price of a stock by its EPS, the P/E ratio is a commonly quoted measure of stock value. In a nutshell, P/E tells you how much investors are paying for a dollar of a company's earnings.
What are the best value stocks to buy right now? ›
Comparison Results
| Name | Price | Price Change |
|---|
| T AT&T | $18.22 | $0.6 (3.41%) After 0.16% |
| INTC Intel | $30.85 | $0.66 (2.19%) After 0.1% |
| MU Micron | $125.00 | $1.29 (1.02%) After 0.2% |
| CSCO Cisco Systems | $46.50 | $0.38 (0.82%) After 0.04% |
5 more rowsKey takeaways
The dividend you receive is based on the number of shares you own and the percentage of profit a company will use for dividends. Not all companies pay dividends, though larger, more established companies are more likely to offer them.
Who is the best dividend investor of all time? ›
It's no wonder why investors closely monitor Warren Buffett's portfolio. He is arguably the greatest investor of all time, and he has doled out some of the best investment advice over the years.
What is the point of owning a stock without dividends? ›
Investors who mostly choose stocks that do not pay dividends look out to increase their capital. These are the kind of stocks where the company reinvests the profits into the business for greater value in the future. This could be for expansion of business, acquiring better resources or even for research.
What is Warren Buffett's best dividend stock? ›
Best of the bunch
- Citigroup. Citigroup (NYSE: C) is one the cheapest stocks Buffett owns based on its forward earnings multiple of under 10.5. ...
- The Coca-Cola Company. Buffett loves The Coca-Cola Company (NYSE: KO) and its soft drinks. ...
- Marubeni. ...
- Sumitomo. ...
- Chevron.
In general, dividend stocks with 0% yield are a warning sign that a company is facing adverse economic conditions or financial hardships.
What to do if we don't get dividend? ›
If you have verified and updated your bank account details but still haven't received the dividend, consider contacting the registrar and transfer agent of the company. The registrar and transfer agent can provide insights into any potential issues or discrepancies regarding the dividend payment.
What if dividends are not declared? ›
“Clause 127 — This clause corresponds to section 207 of the Companies Act, 1956 and seeks to provide that where the dividend has been declared but has not been paid or the warrants have not been posted within thirty days of declaration, every director who is knowingly party to the default shall be punishable with ...
