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What is the incentive to buy a stock without dividends?

By Investopedia Staff

While dividends are the only direct income (money paid out), the total return of holding, a stock is the dividend plus the capital gain of the stock price.

Dividend-paying stocks consist mainly of well-established and mature firms. These companies have grown to a point where they are now leaders in their industries, characterized by having slow but very steady earnings growth. These established companies are mainly concerned with keeping shareholders happy with dividend payments. These companies tend to maintain dividend payments, providing a sense of safety to investors looking to diversify into the equity markets without the high risks of investing in growth companies.

In the past, the market considered non-dividend-paying stocks to be typically growth companies, since expenses from growth initiatives were close to or exceeded their net earnings. This is no longer the rule since a transformation has occurred in today's modern market: firms have decided not to pay dividends under the principle that their reinvestment strategies will, through stock price appreciation, lead to greater returns for the investor. Thus, investors who buy stocks that do not pay dividends prefer to see these companies reinvest their earnings to fund expansion and other projects which they hope will yield greater returns via rising stock price. Although these are generally small- to medium-cap companies, certain large caps have also decided not to pay dividends in the hopes that management can provide greater returns to shareholders through reinvestment.