What Does It Mean if a Stock Doesn't Pay Dividends?

Stock without a dividend can still generate profits.

Cash image by Greg Carpenter from Fotolia.com

Before you can invest wisely in the stock market, you need to know the difference between various types of stock. One way to classify stocks is by whether or not they offer dividends. A dividend is an annual or quarterly cash payment from the company to each of its investors. While not all stock offers a dividend, buying stock without one isn't necessarily a bad decision.

Being a Shareholder

The process for buying a stock that doesn't pay dividends is no different from the process of buying stock that does. Owning each type of stock is also similar. You'll receive statements from your broker outlining the value of your investment and be able to track the price of the stock, buy more shares or sell shares whenever you choose to. The only practical difference is that you won't receive dividend payments. You will still make a profit if you sell shares for more than they cost to buy.

Dividend and Share Price

Some investors prefer to buy stock that pays dividends. This means that when you own stock that doesn't pay a dividend, you may find that there is less demand for it in the market, especially if similar stocks in the same sector offer dividends. However, this consideration is factored into the stock's share price. If you buy stock that doesn't pay a dividend and the company decides to pay one in the future, you can expect the share price to rise as demand increases.

Corporate Finance

A company's board of directors is responsible for deciding whether to offer a dividend, the amount of any dividend it pays and when to stop paying a dividend. The board also makes decisions about other ways to allocate money within the company. When a company decides not to offer a dividend, it keeps more money for its own operations. Instead of rewarding investors with a payment, it can invest in its operations or fund expansion in hopes of rewarding investors with more valuable shares of a stronger company.

Deciding to Invest

The impact of a stock that doesn't pay dividends depends on your personal financial situation. Since stocks without dividends won't supply any income until you sell them, you'll need alternative sources of investment income or work income to meet your spending needs. However, if you don't need to rely on investment income on an ongoing basis, you are free to consider the best available stocks, regardless of whether they pay dividends, when you decide to invest.