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Many companies pay dividends and many companies don't. New companies almost always don't pay dividends since money is usually scarce and the money that they do have is better directed at growth opportunities than to return it to shareholders. Think of it this way: if you're a manager of a business and you're able to use the company's cash to profitably grow the business at 20% a year or instead return that cash to shareholders as a dividend, it's going to be better for everyone involved to just grow the business. Likely shareholders, if given the money as a dividend, would be challenged in finding similar growth opportunities elsewhere.

Once a company gets bigger and there are limited areas for reinvesting to grow at high rates it can make a lot of sense to start returning that money to shareholders. For example, during the 1980's, 1990's, and early 2000's Microsoft and Apple didn't pay dividends but they do now. If companies don't have good investment opportunities for their cash they should return it to shareholders. Some companies do this through dividends, others through share buybacks (hopefully done at prices at or below fair value), and others use a combination of dividends and buybacks.

Google, Facebook, and Amazon are examples of very large companies that still don't pay a dividend. That said, even though they're very large they're all still growing at high rates. Particularly with Google, you'll hear things in the financial press from time to time saying management should start paying a dividend since Google has an enormous amount of cash (about $100 billion) and it doesn't need to reinvest much of that in order to keep growing. Facebook gets less heat since it has less cash and is growing at a faster rate. Amazon has much less cash than either Google and Facebook and also has higher capital expenditure needs so likely it won't be paying a dividend for a while. Although these companies are new-ish they're definitely not new, and Amazon has been around since the 1990's.

Berkshire Hathaway, Warren Buffett's holding company, is another famous example of a very large company that doesn't pay a dividend. Unlike Google, Facebook, and Amazon, Berkshire has been around in its current form since the mid 1960's, so definitely not a new company. At least until very recently, Buffett has been able to reinvest profits at significantly higher rates of return than what shareholders likely would have been able to achieve if given the funds as a dividend. Now that Berkshire is an incredibly large company and not growing like it used to, it also gets some heat in the financial press to offer a dividend.

When exactly a company should start paying a dividend is a matter of opinion and often management and shareholders may not all agree. When a dividend is finally initiated it's often fairly small and then grows in size over time. There was a lot of hemming and hawing in the press to get Apple to start paying a dividend for example, and Apple even had an activist investor (Carl Icahn) kick them in the butt a little to spur them on.

The above are all fairly positive examples of not paying a dividend (growing fast, reinvesting in the business). Another, more negative reason a company may not pay a dividend is that it could have run into financial trouble and had to suspend the dividend. We saw a lot of that during the financial crisis ten years ago.


Mike
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