When investors buy stock of a company they expect to get
returns in two ways, one is as dividends that they receive. The dividends are a portion
of the profits earned by the company. The other is a capital gain in the form of an
appreciation in the value of the share.
Now, when a company
decides not to pay a dividend, the profits that it has made are expected to be
reinvested to increase capacity and the total asset value of the company. The share
holders would then be able to sell the shares they have at a higher rate in the
future.
By not giving dividends the company uses the funds
saved to increase its value and in that way increases the price of the assets with its
shareholders.
A classic example of a company that pays no
dividends is Google Inc. The company came out with their IPO at $85 per share in 2004,
presently the share price of Google is around $500 and they have never paid any
dividends, because dividends are not directly related to stock
price.
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