[Rockstar]

Originally Posted by mookiemookie

A stock that doesn't pay dividends simply means that the issuing company has decided to reinvest the profits in the business (assuming it's profitable.)

Let's look at an example of a non-dividend paying stock. Berkshire Hathaway, the company run by Warren Buffett, owns all or part of companies such as GEICO insurance, General Re, Fruit of the Loom, Acme Brick, Ben Bridge and Helzberg jewelers, Dairy Queen, Justin Boots, NetJets, Star Furniture (these are major major everyday household names in the U.S.)...also significant stakes in Coca Cola, Kraft, Moodys, Wells Fargo.

So for all of those holdings of profitable companies, Berkshire doesn't pay dividends. But shares of BRK A are trading at $121,000 a share. (Brk B, the shares with no voting rights are $80 a share, but still). Why are these stocks worth these huge amounts of money if they don't pay dividends? Because investors know that the company is going to reinvest its profits into more profitable acquisitions. The company has value because the value of its assets are huge, and that if they decided to start paying dividends, they could certainly do so and pay them well. Shareholders want to invest in good, strong companies. They've decided that Berkshire can invest those dollars and deliver strong growth and make smart decisions with the money so they reward that with a higher stock price.

Growing companies such as Facebook make better use of their revenue by reinvesting it back into the company instead of paying it out to shareholders. Investors reward this behavior with higher stock prices. You wouldn't want a company like Facebook to immediately start paying out all of its profits in dividends - there would be nothing left to grow the company with. It would stagnate and may even start operating at a loss. Then you'd have no dividends and no chances for growth. A lose/lose.

Now if a company reduces it's dividend, or stops paying one altogether....that could be a sign of trouble and is a whole other discussion.

Hope this sheds some light on why dividends are not the only measure of a stock's worth.

I thought when a company's dividends starts to rise to those 'too good to be true' payout percentages it too was a possible indicator it might be in trouble soon.