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Reason to buy stocks?
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TOPIC: Reason to buy stocks?

posted 19-03-2012 15:17
As far as I understand, the reason people are supposed to buy stocks is to become shareholders in the company. This entitles them to sa say in how the company is run and entitles them to a dividend, to be paid out from the profits of the company.

But then you have a company like Apple, that hasn't bothered paying any dividends since 1995, despite being one of the most profitable companies in the world for the past 5-10 years, racking up nearly 100 billion dollars in cash reserves. Now they have announced that they will finally pay a dividend, of $2.65. Based on today's share price, that works out at 0.4%. Not very much.

So the only motivation, it would seem, to buy Apple's shares, is pure speculation. Hoping that the price will go up so that you can sell it for more later. Companies, it seems, just don't bother paying dividend anymore, and investors don't seem to care. Or in any case, Apple seem to have case their magical spell not only over consumers, but also investors.

Is it any wonder then that we have boom-bust cycles in economics?

Why aren't companies obliged to give a certain percentage of their profits to shareholders as dividend? You'd think there'd be a rule about this somewhere...
Last Edit: 19-03-2012 15:17:49 by Bryaniek.
posted 19-03-2012 15:55
Apple is a particularly obvious extreme, but it's fairly normal for tech companies, especially start-ups, not to pay dividends. Partly this is because start-ups bleed cash, and partly because of the whole tech alchemy thing where investors believe the stock could experience massive price growth, dwarfing any dividend.

Why aren't companies obliged to give a certain percentage of their profits to shareholders as dividend?


Presumably for the same reason that shareholders of a Plc have only limited control of a company's management in general. The law pays lip service to shareholder ownership, but in practice, for the most part, management have enormous discretion to act as they see fit.
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posted 19-03-2012 15:59
Management is expected to act in the best interest of the shareholders. If that means distributing excess cash to keep 'em sweet (like banks, etc) that's what they do. If it's to reinvest to grow market share or develop new products or technology (ie, Apple) that's what they do. However, Apple's $100 billion horde is clearly at a tipping point.

Warren Buffett has come under similar criticism over his cash horde, but he's defended himself by saying he's not going to buy at any price simply to use up his cash. And not many have been in position to second guess him, given his track record.
posted 20-03-2012 17:46
According to some measurements, Apple is "worth" more than Poland.

But, as we know, the best things in life are worthless.
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posted 20-03-2012 17:49
It's important to remember that both Nortel and RIM were also in that position in the recent past. It can all go away rather quickly.
posted 20-03-2012 17:57
Just out of interest, are there examples of companies that have been known to pay better dividend than the interest you could get from a standard savings accout?

Not looking for investment tips, just wanted to know if it is something that has ever happened.
Last Edit: 20-03-2012 17:57:57 by Bryaniek.
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posted 20-03-2012 18:18
Hells ya.

Here...

www.topyields.nl/Top-dividend-yields-of-TSX60.php

is a randomly googled list of high yield stocks. The yield (percentage) is down the right hand column.

Hard to speak broadly, but certain industries throw off lots of cash and that makes its way down as dividends instead of being reinvested for future growth. Insurance companies, banks, energy producers, etc are good examples.
posted 20-03-2012 18:19
Yes, especially given current interest rates on savings accounts.

They tend to be very large and well established companies that have been at or near the top of their industry for a while.

Here are some examples.
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posted 20-03-2012 18:21
Maybe some people in your village have been caught stealing sheep or bread or something.
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posted 20-03-2012 18:25
Ummmm......yes.
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posted 20-03-2012 18:28
Here's a list of the global best yielding stocks.

www.topyields.nl/Top-dividend-yields-of-NYSE.php

51%....yoy.
posted 20-03-2012 21:37
Pretty much any company that pays a regular dividend will give you a better yield than a standard savings account at the moment. Or indeed ever.
posted 21-03-2012 00:26
Thanks for the links. So dividend yield percentage is basically the equivalent of an annual interest rate.

And of course in the US there is hardly any tax on dividends...
Last Edit: 21-03-2012 00:27:00 by Bryaniek.
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posted 21-03-2012 02:18
Bryaniesta wrote:
Thanks for the links. So dividend yield percentage is basically the equivalent of an annual interest rate.


A mathematician (or GY) could give a better answer, but I'll go with 'no'. It's a percentage of the share price. But since we don't know what you bought the share at, it's probably best to not equate it to an annual interest rate, I think.
posted 21-03-2012 10:52
Yes I understand that, but as a rough comparison, if you use the average share price for the last year, it's kind of like an interest rate.

But I see your point, obviously somebody who boughtt a boat load of Microsoft shares in 1990 is going to be raking in dividend in 2012.
Last Edit: 21-03-2012 10:53:09 by Bryaniek.
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posted 21-03-2012 12:48
Yes, that's fair, I think.
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