How Do Stocks Distribute Money?

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So far nobody has given me a convincing argument that the simple appreciation of a common stock value should be the chief reason to purchase stock in a company. Without dividends it still seems to me that you are setting yourself up to eventually fail, you just hope you get out before the crash and leave somebody else to pay for the fall. After reading your posts I now think I understand something more.



I am working on the assumption that most buswiness will eventually close or fail, therefore if a dividend is never paid, some investors HAVE to lose.



Another ASSUMPTION I make is that if a company keeps growing, then someday they WILL start to distribute their cash when their growth slows.



I still cannot shake my belief that a company that simply states they will never distribute dividends is esentially valueless to the investment community. There can be no net positive return on the investment for the total number of investors as a whole. I cannot understand why this type of investment has become so popular.
 
[quote author="Failedagent" date=1237016247]So far nobody has given me a convincing argument that the simple appreciation of a common stock value should be the chief reason to purchase stock in a company.</blockquote>


No one has given you a <em>"convincing argument that the simple appreciation of a common stock value should be the chief reason to purchase stock in a company"</em>, because that is your reason, not theirs, and not a good reason to buy stock. You are framing the question as yours is the only reason to buy stock. Instead of insisting on others defending your reason, read and listen to what they are telling you is their reason for buying stock.
 
[quote author="Failedagent" date=1237016247]I am working on the assumption that most buswiness will eventually close or fail, therefore if a dividend is never paid, some investors HAVE to lose.</blockquote>
Why assume that? Why assume even a failed business has no value? What percent of companies that ever went public failed, and what percent got bought out? What percent have done neither, and are still operating? Of course some investors will lose, but that's the risk.





<blockquote>I still cannot shake my belief that a company that simply states they will never distribute dividends is esentially valueless to the investment community. There can be no net positive return on the investment for the total number of investors as a whole. I cannot understand why this type of investment has become so popular.</blockquote>For that matter, why not state they plan to drive it into the ground? You can do a lot of things to kill a stock price, but why would they? You're setting a condition that isn't realistic, and trying to draw conclusions from it. An executive or a director can be replaced. A small company with a cheap stock will often get bought; price goes up.
 
MOST businesses fail. It depends on how you define it, but more than 50% businesses on the New York Stock exchange in 1947 were out of business by 1997 and that does NOT include those businesses that were bought out. Exactly how long is the business cycle for most companies? On this blog we talk a lot about people who have drunk the Kool Aid.......Can't you see what happens when a company never distributes its profits? On this blog we think that homes can't appreciate in value forever, but it is perfectly okay if stocks appreciate forever and nobody actually gets paid a dollar from them......

I am not arguing that a person can make money with the current stock market system, it just blows my mind that people think this is rational and will keep going on forever.
 
Companies without dividends still sometimes buy back shares of their own stock. The people who place the least value on their shares sell it to them.



Sometimes they are bought out. You might receive either cash or shares in the acquirer.
 
Yes, this a problem with trying to track companies that have "gone out of business". When I read the 50% os NYSE stocks were out of business 50 years later, I never could verify it because of all the mergers, buyouts, etc.
 
[quote author="Failedagent" date=1237257509]Yes, this a problem with trying to track companies that have "gone out of business". When I read the 50% os NYSE stocks were out of business 50 years later, I never could verify it because of all the mergers, buyouts, etc.</blockquote>


Then, would it be safe bet to short the market? If the companies do not pay their profits to their shareholders and most either go out of business or get bought out, would it be smart to short?
 
I don't know how anybody could short the market over a 50 year time span. You have to pay money to hold a short position. By the way, I originally posted this thread to learn something about how markets operate, not to claim a position and try and defend it. I have heard many arguments about why paying dividends is bad policy, double taxation being Warren Buffet's prime reason. BUT, I still can't get it. If you invest a lot of money in IBM, all IBM has in tangible assets is some buildings, land, and a little bit of cash. Even if their earnings shot up 200% next year, what would an investor really have? You would have the right to that stake a claim to that income stream. Now if we promise never to distribute the income stream, what do you have? Nobody ever gets paid any money, and the next guy who buys his shares from YOU also knows that. It is just a perpetual cycle of nobody actually getting to spend that income stream. Even is IBM makes a bazillion dollars, the stock shoots to moon in value, but nobody outside IBM gets to spend that money. For the privilege of not getting to spend any of that money, somebody will pay you a large premium. In return he hopes to find somebody to pay even more for the privilege of not spending any of the money. I can't believe this idea can work in the long term. Obviously it does for many...



It is my theory that the market will have to start adopting a more dividend based approach to stock valuation in the next few years. There are excellent arguments for not paying dividends, but I think the only justification for that would to allow substantially larger dividend payments in the future. This WAS how the market worked in the past and it will probably return to this in the future. Of course I am probably wrong.....
 
Another thing that just occurred to me, if you reinvest your dividends what do you get next year? More dividends! So reinvesting dividends in a company that distributes dividends ultimately buys you a larger income stream in the future. In the future you can stop reinvesting the dividends and just take home the money.
 
[quote author="Failedagent" date=1237443395]Another thing that just occurred to me, if you reinvest your dividends what do you get next year? More dividends! So reinvesting dividends in a company that distributes dividends ultimately buys you a larger income stream in the future. In the future you can stop reinvesting the dividends and just take home the money.</blockquote>


You keep repeating yourself. Why? Why did you ask why people would buy equities if you already know why they should not? If you really want to know, why are you not listening to their answers? People and institutions buy equities that do not pay dividends because they think someone else will want to buy those equities for more than they bought them for. That's it. That's all there is. They are not expecting the company to return money to them. They are not expecting the company to return money to them. They are not expecting the company to return money to them. So, no matter how many times you say it is unrealistic for people to expect the company to give them an ROI, they do not care. Your reasons are not theirs. And my guess is that not one person in one thousand who invests in equities that do not pay a dividend care that the company does not pay a dividend or return money to them. They buy the stock because they think someone else will buy it for more. If you think that is a dumb reason to buy stock, ... yeah, ... so?
 
[quote author="awgee" date=1237448425][quote author="Failedagent" date=1237443395]Another thing that just occurred to me, if you reinvest your dividends what do you get next year? More dividends! So reinvesting dividends in a company that distributes dividends ultimately buys you a larger income stream in the future. In the future you can stop reinvesting the dividends and just take home the money.</blockquote>


You keep repeating yourself. Why? Why did you ask why people would buy equities if you already know why they should not? If you really want to know, why are you not listening to their answers? People and institutions buy equities that do not pay dividends because they think someone else will want to buy those equities for more than they bought them for. That's it. That's all there is. They are not expecting the company to return money to them. They are not expecting the company to return money to them. They are not expecting the company to return money to them. So, no matter how many times you say it is unrealistic for people to expect the company to give them an ROI, they do not care. Your reasons are not theirs. And my guess is that not one person in one thousand who invests in equities that do not pay a dividend care that the company does not pay a dividend or return money to them. They buy the stock because they think someone else will buy it for more. If you think that is a dumb reason to buy stock, ... yeah, ... so?</blockquote>


Why awgee? Why? Why are you covered with mud?



Ignore the ignorant and celebrate the fact that our goverment just ordered more ink cartriges!
 
[quote author="Failedagent" date=1237431858]I don't know how anybody could short the market over a 50 year time span. You have to pay money to hold a short position. </blockquote>


There are plenty of short ETFs out there you can buy and hold. If you really think most companies will fail and buying equities is a bad idea then put your money where your mouth is and we'll compare portfolios after 50 years.
 
eeerrr...Mr. Condo.....no you don't want to compare portfolios over my LAST 50 years! Yes the voice of experience is talking.



Don't ANY of you guys get the concept behind putting a post up for the purposes if discussion and learning or do you just HAVE to score points? Come on, GROW a little....
 
[quote author="Failedagent" date=1237463138]eeerrr...Mr. Condo.....no you don't want to compare portfolios over my LAST 50 years! Yes the voice of experience is talking.



Don't ANY of you guys get the concept behind putting a post up for the purposes if discussion and learning or do you just HAVE to score points? Come on, GROW a little....</blockquote>


Yes we do understand...however...here is a dialogue.



Me: This is a tomato. The color of the tomato is red.

You: Nice. But why is it red? Why isn't it blue?

Me: Because the color of the tomato is red.

Someone Else: Yes, that color is red.

You: But isn't it really blue?

Me: No, it is red.

Someone Else: It's red dude, RED!

You: I don't get it. If the tomato is round, why is it red?

Me: Because that is how it is. It's red!

You: I still think it should be blue, not red. Why red?



Get the point?
 
[quote author="BlackVault CM2" date=1237500219][quote author="Failedagent" date=1237463138]eeerrr...Mr. Condo.....no you don't want to compare portfolios over my LAST 50 years! Yes the voice of experience is talking.



Don't ANY of you guys get the concept behind putting a post up for the purposes if discussion and learning or do you just HAVE to score points? Come on, GROW a little....</blockquote>


Yes we do understand...however...here is a dialogue.



Me: This is a tomato. The color of the tomato is red.

You: Nice. But why is it red? Why isn't it blue?

Me: Because the color of the tomato is red.

Someone Else: Yes, that color is red.

You: But isn't it really blue?

Me: No, it is red.

Someone Else: It's red dude, RED!

You: I don't get it. If the tomato is round, why is it red?

Me: Because that is how it is. It's red!

You: I still think it should be blue, not red. Why red?



Get the point?</blockquote>


Pretty good, but I think you a bit off.



He is saying the tomato is blue, and it should not be blue.

Everyone else is saying the tomato is red, and "should" is irrelevant.
 
I think I learned something valuable from this discussion. Lots of people simply don't care whether a company ever distributes the income or not. It simply doesn't bother them. As long as they think they can find somebody who will pay them more for their ownership at a later date, they are happy. Fair enough.



Does this make any sense to me? No.



Am I the only one who sees a problem with this business model? No.



Will future investors demand a real dividend payment? A few do now and maybe the concept wil get more popular again as it was in the 1930's-1960's. Maybe it won't.
 
[quote author="Failedagent" date=1237618445]I think I learned something valuable from this discussion. Lots of people simply don't care whether a company ever distributes the income or not. It simply doesn't bother them. As long as they think they can find somebody who will pay them more for their ownership at a later date, they are happy. Fair enough.



Does this make any sense to me? No.



Am I the only one who sees a problem with this business model? No.



Will future investors demand a real dividend payment? A few do now and maybe the concept wil get more popular again as it was in the 1930's-1960's. Maybe it won't.</blockquote>


Bingo!



My forecast a couple of years ago is that when all this shakes out, dividend paying stocks will become much more highly valued.





But, as far as it making sense, do you ever go to Las Vegas? The odds are against the player, and yet people continue to gamble even though it makes no sense.





Personally, I can not stand Las Vegas. I hate to gamble. I do not gamble. And yet, I do invest in the stock market. I short sell. And I invest in whatever asset I think others will be investing in, in the future.





If investing in non-paying dividend stocks does not make sense to you, what do you perceive is a better investment for you and yours.





By the way, buying real estate, even a residential home to live in, with an eye on "appreciation" is no different than investing in non-dividend paying stocks.
 
[quote author="asianinvasian" date=1237629149]Same with buying gold. LOL.</blockquote>


Even more so with gold. Not only does it not pay interest or dividends or provide shelter, sustenance or energy, but the owner has to pay to keep it secure. I once read, "95% of the time gold is a terrible investment. The other 5% of the time, it is the only investment."





Had to go before I finished the previous post.

For me, successful investing is less about what makes sense than figuring out what asset will be more valued in the near future; one to three years. If I only invested in what made sense to me, I would be much poorer right now.





Example: It is absolutely ludicrous for the current crop of politicians to think that they can borrow and spend their way out of a solvency, (debt), crisis. It makes no sense to do what they are doing. And if I thought that I should not invest based on the idea that they will not borrow and spend because it makes no sense, I would lose out on opportunity to increase my assets. Instead, it is prudent to realize that the pols and the Fed will borrow, spend, and increase the money supply because that is what they have always done whether it makes sense or not, and invest accordingly.





For me, successful investing has almost nothing to do with what makes sense to me, but rather understanding how fear and greed will motivate others.
 
There ya go. That is how I approach stocks. I do my homework, analyze data, look at technicals, process economic data, and understand what the media is doing. Then after all that, I decide how an average person will react. Will they fear, will they get excited? Then I act accordingly and hopefully before they do.
 
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