How Do Investors Make Money Without Getting Dividends?

Simple. By biding their time.

A dividend is a slice of a company’s earnings that the company elects to return to its shareholders. Dividends are typically paid out by seasoned, mature companies that have been in business for many years. Think: IBM, Procter & Gamble, Microsoft. When a company’s management team can’t drum up additional growth opportunities inside their firm, they often start paying dividends as a way to interest shareholders.

Investors who favor dividends are known as “income investors.” They favor dependable cash infusions from their investments over the hope for those investments to experience explosive growth and higher valuations. 

When a company doesn’t pay dividends (they're not required), it usually plows the extra cash back into its operations with an eye towards giving investors much higher value in a more robust company down the road. In fact, there’s an entire segment of investors who prefer to buy stock in companies that don’t issue dividends. They’re known as “growth investors” and want to back companies that are concentrating on product development, strategic acquisitions, and expansion.

Companies that are focused on growth, and scaling operations, seldom pay dividends. But, that doesn’t mean their stock isn’t worth buying. Those companies are busy growing the value of their business—and therefore the value of your stock. Buying stock in companies that don’t pay dividends, but are intent on building their business, can be a win-win for both investors and the company. Think: Berkshire Hathaway, Amazon, Chipotle. None of them pay dividends, but their stocks… well:

• If you’d bought $8000 of Berkshire Hathaway as an early investor, those 1000 shares are now worth an eye-popping $264,280,000 (May, 2020). But zero dividends.

• Amazon doesn’t pay dividends either… has the value of their stock increased?

  • Yes, because they reinvest their profits straight back into the business, giving their shareholders a much more attractive reward than dividends ever could. 

• Between July 2019 and July 2020, the fast casual chain Chipotle, drastically blew the broader market away by reporting a return of 43.3%, while the S&P 500 posted an anemic 4.7%.

  • Since March 2020, the restaurant industry has suffered due to the pandemic

    • However, in the fast casual sector, Chipotle’s stocks soared to more than double the broader market

    • They’ve opened 19 new restaurants in the first quarter of 2020

    • They opened their 100th Chipotle in July

    • They’ve hired about 8,000 new employees since the pandemic took hold

  • But again, no dividend, because Chipotle’s a high-growth stock that’s thriving

So, “income investor”? “Growth investor”? Which are you?

Do you want a dividend drip, or a shot at explosive growth?