Understanding The Point Of Buying Stocks With No Dividends
There are some very good reasons why investors buy stocks without dividends. And I’m here to present those reasons and discuss them with you today.
Because what is the point of buying stocks without dividends? When you don’t understand the reasons for doing so.
With that said, let’s get moving. Then you can start investing…
Why Buy Stocks Without Dividends? (7 Reasons)
You came here to learn why investing in stocks with no dividends is a good idea. And my answer to this question revolves around 7 reasons.
Specifically, because you…
- Do not need the money from dividends
- Prefer growth vs dividend investing
- Have the desire to maximize tax efficiency
- Want the most cash invested for compounding returns
- Like diversification beyond traditional dividend-paying sectors
- Think companies can reinvest profits for better returns
- Believe share buybacks are a better use of company funds
Next, let’s explore each of these reasons in greater detail. Then you will know exactly what I’m talking about.
Better yet, before we are done. I will give you some examples of the best stocks with no dividends.
Let’s do this…
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
1. Do Not Need The Money From Dividends
The first reason might be the most obvious. And easiest to understand.
Specifically, when you do not need the immediate cash flow. That the passive income from dividend stocks provides.
When this is the case, non-dividend stocks become a more viable option.
On the other hand, if you desire dividends to fund retirement. Or, to supplement your living expenses.
Then, dividend vs non-dividend stocks may be the better alternative.
Okay. We are just getting warmed up.
So, let’s move to the 2nd reason explaining why to buy stock with no dividend…
2. Prefer Growth Vs Dividend Investing
First of all, every investor should have a strategy.
Because an investment strategy is an approach that helps guide one’s decisions. About what to invest in. And, why and you should.
Furthermore, there are many different types of investing strategies to choose from. Such as investing for growth rather than income.
What do I mean when I say growth? That’s easy…
I’m talking about increasing stock prices.
Also known as capital gains that stocks can generate. Most importantly, growth stocks have the potential for higher appreciation in the share price. Versus stocks that pay dividends.
Why buy a stock without dividends? Here is reason #3. And it is closely related to reason #2…
3. Have The Desire To Maximize Tax Efficiency
Unless you buy and hold your stocks in an IRA. Which is a great idea, by the way.
Especially if you open your IRA at Webull. For buying and selling your stocks for free.
More likely than not, you will pay taxes on your dividends.
This is true even if you reinvest your dividends received automatically. Right back into the stock that paid them.
Yes, dividends are taxed at lower rates than income from your job. This is also known as dividends receiving preferential tax treatment. And, best of all, if your income is low enough, no tax may be due.
But, in most cases, part of the dividends you earn will need to be allocated to your income tax bill. As a result, stocks with no dividends are more tax efficient.
Because when you buy and hold stock without dividends. As long as you don’t sell it, no tax is due. At least under the current tax laws. This is called unrealized capital gains.
And where I come from, paying fewer taxes on stocks is better than paying more!
Bringing me to the next point in this discussion about why buy stocks without dividends…
4. Want The Most Cash Invested For Compounding Returns
Now you know, by investing for capital appreciation. While avoiding dividends. No income tax is due.
On the other hand, every dollar of dividends gets taxed. So, what does this mean?
It means paying taxes reduces the amount of money you have available to invest.
In contrast, holding a growth stock that is appreciating. Leaves all of your money invested.
And the more money you have invested. The faster you can compound your net worth from stocks.
Boil it down, and it’s pretty simple. The more you have invested. Without the drain from income taxes reducing your investment portfolio means…
Invest more money. Keep more money invested at all times. Then, make more money from your investments over the long run.
This seems logical to me. Because stocks go up over time.
Why invest in stocks without dividends? Well, here’s another good reason…
5. Like Diversification Beyond Traditional Dividend-Paying Sectors
Most good dividend investors know where to hunt for dividend-paying stocks. Because they often fall in certain stock market sectors and industries.
Those industries are known for slower revenue growth, limited investment potential, and generating large amounts of free cash flow from their operations.
Some of these traditional dividend-paying industries include…
- Big box retail
- Health care
- Household goods
- Food and beverage
- Oil and gas
- Real estate investment trusts (REITs)
…to name just a few.
On the other hand, some investors do not want to limit themselves to these industries.
They want to invest in farmland, high-growth micro-cap companies, start-ups, cutting-edge tech, biotechnology, or electric vehicles.
Where many of these types of investments and companies issue stocks with no dividends.
Why make investments of this type? One reason is to achieve a greater level of portfolio diversification. Beyond just traditional dividend-paying stocks and sectors.
Why buy a stock without a dividend? Here is another couple of reasons to think about.
They relate to how a company chooses to use its cash.
6. Think Companies Can Reinvest Profits For Better Returns
First of all, when companies pay a dividend, that cash is gone. It belongs to the shareholders that received it. And can never be taken back.
Furthermore, every company has a variety of options for using their limited supply of cash. One option, rather than paying a dividend, is to reinvest it back in the business to generate a return.
Think of it this way…
Better Off Buying A Stock Without A Dividend
When you receive a dividend, first you have to pay income taxes. Then with the money left over, you can invest it.
Let’s say, you are a success at dividend investing. And by making good investments, you earn 10% per year over the long run. That’s a good return on your money.
On the other hand, successful companies can take the cash otherwise used for dividends. And reinvest it into internal projects and assets.
Such as factories, equipment, people, and technology.
Well-run companies with top-notch business models can often identify and execute outstanding investments. That may return 15%, 20%, and sometimes more.
As result, those investments increase a company’s earnings per share. And over the long run, a company’s share price will increase along with those rising earnings.
So, if a company can continue to reinvest profits into projects that return 20% annually. Then it is highly likely (although no guarantee) that the company’s stock will rise on average 20% per year.
Beating the 10% return you could generate on your own.
Thus, earning more for shareholders. Versus what an individual stockholder can earn with the dividend income they receive.
All of this adds up to one of the many good reasons to avoid dividend stocks.
Next, I have another way a company can use their cash. Versus paying dividends. That also may generate a better result for their investors.
It’s my 7th and final reason to answer the question: why buy non-dividend stocks…
7. Believe Share Buybacks Are A Better Use Of Company Funds
Simply put, companies can use their cash to repurchase shares of their stock on the open market. Rather than paying dividends that management increases over time.
There are 2 benefits to this use of cash.
First, by reducing the number of shares outstanding. All else being equal, earnings per share rise.
And we know increasing earnings usually correlate with a rising stock price.
Second, if a company pays a dividend AND repurchases its shares. A common practice.
The company reduces the amount of cash required for dividends. Since the number of outstanding shares has been reduced.
Thus, conserving more cash. For internal investment purposes.
Finally, share buybacks are especially beneficial when management feels the company’s stock is undervalued. Sometimes in an extreme case, the company will trade for less than book value.
Just like you and I. Companies benefit by buying their stock when the stock price is lower rather than higher. It’s part of what makes value stocks a good investment strategy.
Okay. That concludes my top 7 reasons regarding the topic: why buy stocks without dividends?
However, I made one more promise at the start of the article. And that was to share some top stocks that do not pay dividends.
Allow me to do that next. Then, I will wrap up.
Some Of The Best Stocks Without Dividends
To pick these stocks, I just looked at a list of large publicly traded companies with no dividends. And picked several that I know have been high-performing investments over the years.
High-performing stocks with no dividends:
- Amazon (AMZN)
- Alphabet (GOOG)
- Berkshire Hathaway (BRK.B)
- Meta Platforms (META)
- Tesla (TSLA)
And if you are looking for more great stocks like these. Be sure to check out the Motley Fool Stock Advisor. For excellent stock recommendations delivered to your inbox every month.
Now, for full disclosure. I don’t own any of the stocks I just listed.
Why not? You might be asking yourself.
Well, for anyone that follows me here. You know that I won’t own a stock that doesn’t pay a dividend.
Because I’m a dividend investor. So, I stick to a dividend strategy for investing purposes.
But that doesn’t mean there aren’t other ways to make money investing. And, I always enjoy examining the other point of view.
Okay. With that little explanation taken care of. Please allow me to wrap up with a few parting words…
Why Buy Stocks Without Dividends?
There are many good reasons to buy stocks with no dividends. They mainly relate to investment strategy, tax implications, diversification, and a company’s ability to allocate its capital in more productive ways.
Of course, I can come up with just as many good reasons for investing in stocks that pay dividends. Because good investments can be of all types and varieties.
In the end, hopefully, I have helped you answer the question: should I invest in stocks without dividends?
Most of all, no matter what you decide. My best wishes. And thanks for reading.
Finally, if you found this article helpful. You may benefit from checking out…
… in our archives. For your reading pleasure.
Author Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.