---
title: "Why Do Some Companies Not Pay Dividends?"
description: "Why do some companies not pay dividends? They might have better uses for the money! Alternatives to dividends and what they man for you."
canonical_url: https://trendshare.org/how-to-invest/why-do-some-companies-not-pay-dividends
markdown_url: https://trendshare.org/ai/why-do-some-companies-not-pay-dividends.md
published: 2013-04-10
last_updated: 2017-06-14
content_license: https://trendshare.org/about/disclaimer
---
# Why Do Some Companies Not Pay Dividends?

Source: https://trendshare.org/how-to-invest/why-do-some-companies-not-pay-dividends
Updated: 2017-06-14
[When you buy a share of a company, you become an owner of that company](https://trendshare.org/how-to-invest/what-is-investment). You are entitled to share the profit the company
makes every year—you shared in the risk, and you share in the reward.

## How do Dividends Work?

A dividend is a portion of the profit the company makes, which is paid to
each shareholder. For example, if Acme Lemonade Stands makes a million dollars
in profit and has a million shares, the company *could* pay a dollar per
share as a dividend. The profit of the company belongs to its owners—its
shareholders—so they're entitled to that profit *somehow*.

A dividend is a portion of the profit of the company. The directors of the
company look at the financial health of the company and decide whether it's
better to pay some of the profit of the company to the shareholders or to do
something else with the money.

If you're a shareholder, a dividend is nice because it's money you earn from
owning the stock. Think of it like the interest you earn on a money market
account or a CD. This is money you earn from stocks without even selling them;
remember to calculate this [dividend yield](https://trendshare.org/how-to-invest/what-is-dividend-yield)
in your [rate of return](https://trendshare.org/how-to-invest/what-is-a-good-annual-rate-of-return).

## When Do Stocks Pay Dividends?

The frequency of how often companies pay dividends varies. Good stocks often
pay dividends quarterly. It varies by company, but a good company with a
regular dividend will pay out every three months, often announcing the dividend
with its quarterly earnings. A really good company with a reliable dividend may
send you a check every three months just for owning a share of stock.

The company's directors and executives have to consider several criteria
when deciding the frequency and amount of dividends. Regular payouts can
demonstrate attractive stability. Many investors like reliable dividends
because they count on that money every quarter. They know that every share of
Acme Lemonade Stands will pay them a dollar per share every year, as long as
the business continues to make profits.

The best dividend paying companies increase their payout regularly. That's a
sign of true long term success. These are well-established companies, like [DJIA](https://www.dowjones.com/) stalwarts [GE](/stocks/GE/view) and [Coca-Cola](/stocks/KO/view). They
may not see booming growth of smaller companies because their valuations are so
high already, but they continue to make lots of money every year and return it
to shareholders.

If your portfolio contains mutual funds or index funds, they're receiving
the dividends and calculating the increase for you. Many fund companies like [Vanguard](https://investor.vanguard.com/home/) have high dividend
yield index funds, such as [VYM](https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0923),
available.

*Why do companies pay dividends?* Because [profits belong to the owners of the company—the shareholders](https://trendshare.org/how-to-invest/why-do-companies-pay-dividends)—and the company doesn't see any better
opportunities to invest the money.

## What are the Alternatives to Paying Dividends?

Do all stocks pay dividends? No. To pay out, a business must have that money
available somehow. Other companies earn very small profits or need the working
capital for liquidity purposes, so it doesn't make sense to pay dividends.

Even if the business has the money, it still has a few alternatives.

A company might choose to hoard its profit. This is especially true for [businesses with cyclical sales and profits](https://trendshare.org/how-to-invest/what-is-a-cyclical-business). For example, an airplane manufacturer might spend a lot of money
one year building or upgrading a factory. It might lose money that year. In a
couple of years, when the factory is making lots of planes and selling lots of
planes, profits might go up, and so the company will prefer to save that money
to buy the next factory.

Similarly, a company that plans to grow much larger might reinvest its
profits back into the company so that it's worth more in the near future. You
often see this in technology stocks, where acquiring more customers or
increasing the value of each customer will hopefully produce even more revenue
in the future—and more profits.

A company might also acquire other companies. This is similar to investing
in the company. You can see this happen in very large companies, where it's
cheaper and easier to buy an established but smaller company than it is to
start a new line of business.

Finally, [a company might buy back shares of its stock and retire them](https://trendshare.org/how-to-invest/why-do-companies-perform-stock-buybacks), so that every remaining share
owns a larger piece of the company and thus becomes more valuable. This
strategy makes a lot of sense when the price of the company's stock is
artificially low.

Each of these choices has a common theme: the intent to make the company
itself intrinsically more valuable, whether by expanding the customer base and
product offering, by providing opportunities to enter new markets or capture
more of an existing market, or by increasing demand and thus raising the price
of the stock itself.

A company which can do this is worth more than gold; a company with a solid
business that grows and generates more cash every year is a great company to
own. Instead of financing its growth (or even continued operations) through
debt, it's free to build up its own equity.

## Why Do Some Companies Not Pay Dividends?

A company may not pay a dividend if its directors believe that it's better
to put the business's profits to work making the business itself more valuable.
Warren Buffett's [Berkshire Hathaway](http://www.berkshirehathaway.com/) does not pay dividends. The company famously grown through
acquiring other good businesses, mostly in the US and Canada, many of which
themselves do pay dividends. If Buffett and his partner Charlie Munger ever
felt that the best use of the company's profits were to return it to
shareholders, Berkshire Hathaway *would* pay a dividend.

An established business with a dominance in the market and few opportunities
to grow may not have this luxury. In that case, the value of the stock includes
the consistent dividend payout. In other cases, the value of the stock depends
on the company growing larger and making steadily more money.  These growth
stocks often do not pay dividends.

Yet [dividend stocks have their risks](https://www.fool.com/investing/dividends-income/2015/04/04/2-little-known-risks-of-dividend-stocks.aspx), too. Yields don't always rise. Profits can be
volatile. Payouts can be [cyclical](https://trendshare.org/how-to-invest/what-is-a-cyclical-business).
The effect of interest rates on dividend stock prices is complicated.
Furthermore, some companies facing difficult times might raise their dividend
payouts to appear more attractive. Always check to see what the real cash flow
situation is before you chase down the highest dividends.

A stock with a reliable dividend payment with increasing yield is worth
considering, but chasing the highest dividend paying stocks is not always the
right choice. Plenty of good businesses have great stocks and never pay a
single cent to investors. Look for great stocks, not necessarily quarterly
checks.