Don't get hung up on dividends, instead focus on "return of capital." Dividends are one way to return capital (and until recently the primary way to return capital) but share buybacks are another.Hi all. I would have posted in my previous post since this one is sort of related to it but the question is different and I would like to maximise engagement since these are fundamental questions for me and for all the novice to investing. So in my previous post I proposed a fruit for thought as to what is the internal value of a stock if we remove buying/selling from the equation. Many people had great points but it basically boils down to current dividend payouts as passive income stream or anticipation of dividends in the future. I want to further develop this idea. So there are companies with stellar track records which do pay dividends already and you'll get a steady dividend payout from a stable company albeit with limited potential for further growth of the company itself. At the same time, we have companies that might or might not have huge growth potential but do not pay dividends, and no one can tell when they'll do it nor can anyone force them to. Why does the stock price of the latter type go up if there exist companies of the former type? Does the stock price growth of such companies basically depend on someone buying it in order to find a "greater fool" further down the line? Again, the dividends will come god knows when and they'll be minuscule compared to the established companies with the likes of Exxon, McDonalds whose dividend yields have reached 5-6 percent in the past. The only thing that I can think of is that the companies with growth potential and no dividends are the ones which are widely expected to disrupt existing industries and create new ones which would drive the currently established companies out of business. Therefore a rotation will happen with the growing companies now becoming established with dividend payouts while the former established ones going obsolete. Appreciate any input. Don't go harsh on me please.
Apple, as one example, has returned about $800 billion to shareholders via stock buy backs since 2012:
https://www.marketwatch.com/story/apple ... s-914ec60a
Apple's market cap in 2012 was around $500 billion to $600 billion so $800 billion returned to shareholders over the past 12 years is pretty good.
Another way for companies to return capital to the shareholders is to get bought out for cash. Sun Microsystems, for example, went public at a market capitalization of something (I can't find what it was ... I'm guessing less than $1 billion?) and was purchased in 2008 by Oracle for $7.4 billion. Put $1 billion (or whatever) in and get $7.4 billion out a number of years later is fine (though not so fine as it could have been as Sun had a market cap of $200 billion at the peak of the dot-com bubble).
However ... a company that NEVER returns capital, such as Silicon Graphics, and then goes out of business isn't worth anything even if people think it is worth something at various times.
But dividends by themselves are not terribly important. Return of capital (even in the future) is. And future return of capital is uncertain ... which is one reason that stocks are riskier than bonds.
Note also that dividends aren't guaranteed, either. Boeing cancelled theirs a few years back.
Statistics: Posted by MarkRoulo — Sat Oct 05, 2024 10:27 pm — Replies 22 — Views 1057