There are two ways you can benefit by investing in the stock market. First, you can make money by selling a stock at a higher price than you bought it.
Second, you can benefit from the dividend payments made by the company whose stocks you have acquired. A dividend is the proportion of a company’s profit distributed to shareholders.
1.) You benefit from selling the stocks at a higher price than the purchase price:
When you invest in a company that does not pay a dividend, you could benefit from it by selling it later for a higher price than you bought it. Companies that do not pay dividends are often companies that are still in a growth phase and prefer to reinvest their profits to continue investing in the company’s growth.
If the company stocks are sold, it should be noted that capital gains tax is usually payable on capital gains. This can vary from country to country. It is important that you are aware of the existence of this capital gains tax and that you incorporate it into your decision-making process when buying or selling stocks.
Those companies that don’t pay dividends are often companies from the technology sector. Specific examples of companies out of the technology sector that do not currently distribute dividends are Alphabet, Amazon, Booking, Meta (formerly Facebook), Netflix, Paypal and Tesla. But there are also several examples of companies that do not pay a dividend and are from other sectors such as consumer goods, health care, telecommunications and financial services. Some examples are companies such as Monster Beverage (consumer goods), Berkshire Hathaway (holding company), Biogen (biotechnology), Charter Communications (telecommunications) and Block (formerly Square) from the financial services sector.
For the shareholder, in the end, it doesn’t matter so much whether the company pays a dividend or not. What’s much more important is that management decides what is best for the company, because the shareholders can benefit from this in the long term.
For a company like Amazon, for example, which is constantly expanding its business in order to continue to grow, it can be more attractive to put the profits back into expanding its own business activities. The shareholder benefits from this again when Amazon can increase its sales and profits in the long term by expanding its business activities. This, in turn, has a positive effect on the stock price in the long term, from which the shareholder can ultimately benefit.
2.) You benefit from receiving dividend payments:
If you are planning to benefit from the investment, particularly through the dividend payment, a long holding period of the positions can be a good idea. With a long holding period, you can get your original investment back by receiving dividends.
For example, let’s consider a company that pays a dividend yield of 7% and pays that dividend consistently (let’s assume it doesn’t increase or decrease the dividend over time). With this investment, the investor could get his original investment back after less than 15 years throughout the dividend (For the sake of simplicity, no withholding taxes were included in the calculation).
Examples of companies that pay high dividend yields are usually those who already have a very established business model and no longer have to invest a large part of their profits in the expansion of new business activities. Companies from the gas and oil sector (such as TotalEnergies, ExxonMobil, Royal Dutch Shell and Petrobras), tobacco goods sector (such as British American Tobacco and Imperial Brands), telecommunications sector (such as Verizon, AT&T and Telefónica) and the insurance sector (such as Allianz and Axa) can be named here as examples of companies that currently pay high dividends.
It can be a good choice for an established insurance company with an established business model that generates constant cash flow to pay a dividend, as it no longer needs as much money to expand its own business.
Before investing, you should be clear about how you can best benefit from this investment:
It is important to analyze companies carefully before investing in them. Financial data such as revenue, earnings, price/earnings ratio and profit margin are just a few of the company metrics that need to be analyzed. The analysis of competitive advantages should play an especially central role before you take an investment decision. Here you can find all currently available investment analysis.
Before you take the investment decision, you should be clear about how you plan to benefit from the investment: Through the subsequent (partial) sale of the company in the future or through the dividend payments or even through a combination of both.