When you start value investing in the world of stocks and shares, one particular word will pop up again and again. This word is of course dividend. The dividend is the profit that the share of stock brings. When companies pay out dividends you will receive some money and the opportunity to either take it or reinvest it into the company.
Corporations have changed their view of dividends over the past few decades. Originally corporations worked very hard to pay out dived ends to their stock holders. They wanted to keep money flowing and of course keep the stock holders happy. However, in more recent times corporations have been changing their view. Many of the top corporations in the world got that way by not paying dividends and re-investing in the company.
As a company grows and becomes more profitable, it can do one of two things. IT can increase its number of shares and bring in more investors, or it can start buying back stock and reducing the company debt. Corporations that take the second option make their individual share prices soar in value, provided the company has been managed well. When the individual share price increases everyone benefits.
A great example of this practice is the Microsoft Corporation. The company did not pay out on a single dividend until it was worth over 350 billion dollars. It kept reinvesting its profit back into the company, making all who were shareholders very wealthy. Other companies that went this route to some extend were Wal-mart, Home depot, and the Coca-Cola Corporation.
When value investing, how one looks at dividends can be quite important. Before, many looked at how often the corporation paid out for its shareholders. However, it can also be a good sign when corporations buy back stocks and hold off on paying dividends. The corporations will grow as a whole making the stock shares more valuable.
When value investing, both methods can be profitable if your willing to wait for the long term. Getting rich quick doesn’t happen unless you’re extremely lucky. Keep you money in and keep re-investing. In the long term you will come out a winner.