Question

A substantial percentage of the companies listed on the NYSE and the NASDAQ don’t pay dividends, but investors are nonetheless willing to buy shares in them. How is this possible given your answer to the previous question?

Answer 1

There are several ways in which corporations are valued, one of them is the dividend discount model, and the most common is the discounted cash flow model. When a corporation doesn't pay dividends, it can invest that money in future or existing projects, which will eventually increase the corporation's net income. Remember that $1 distributed to shareholders is $1 less that can be invested.

Of course stockholders love dividends, but a firm that pays a really high dividend payout ratio will not grow. Sooner or later that will ultimately hurt the corporation and jeopardize its future. The higher the dividend payout ratio, the lower a corporations sustainable growth rate.