From: Lee Daniel Crocker (lee@piclab.com)
Date: Mon Sep 09 2002 - 18:38:42 MDT
> Of course, you CAN make money off of a stock by receiving a dividend.
> But it's well understood that you don't buy stocks *so that you'll get a
> dividend*; instead, you buy stocks so that you can reap the rewards when
> their price goes up (ie, when other people are more interested in buying
> your stock). The reward of owning stock is therefore realized only when
> the stock is sold.
Back when the stock market was rational, people only bought stocks
that had the potential to make and sell things that would generate
profits, from which dividends would be distributed to shareholders.
The idea of making money primarily on the value of the stock itself
was called--and rightly so--"speculating". The potential for dividends
really was the driving force of stock investing, and probably still
should be. Without that, you are completely correct that buying stock
is essentially pointless in the long run.
Of course, a human lifetime is the short run, so speculators rule.
> Even if dividends *were* the only way in which stocks could make money for
> their bearers, then there's a huge number of stocks out there whose value
> cannot be explained, because they do not offer dividends and do not intend
> to offer dividends anytime soon, if ever. If dividends were the only way
> a stock could benefit its bearer, these no-dividend stock prices would be
> totally inexplicable.
If the speculators own a controlling interest, they can keep a company
from issuing dividends for a long time and live on growth, but such a
scheme will eventually collapse when growth limits are reached (and in
an expanding economy with growing technology that can be a long time
indeed). when growth no longer works, they have to settle on profits and
dividends. All companies eventually do, unless they go belly up first.
To a lesser extent, one's voting interest does help you funnel some
pre-dividend profits to directors you choose and subcontractors you
have sweetheart deals with and such. But there really is no way for a
shareholder to /directly/ profit from stock ownership except by
dividends or speculation.
> And, as a related question: why would a firm's shares be worth more, all
> else being equal, if the firm's profits increase?
More avilable funds to grow, buy out competitors, grow more, etc. More
opportunities for short-term speculation and greater chances for longer
term dividends. That's really all there is; but you're right that a
lot of people seem to have forgotten that.
-- Lee Daniel Crocker <lee@piclab.com> <http://www.piclab.com/lee/> "All inventions or works of authorship original to me, herein and past, are placed irrevocably in the public domain, and may be used or modified for any purpose, without permission, attribution, or notification."--LDC
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