Dividend stocks have a key role to play in many investors’ portfolios. Shareholders receive regular cash payouts from dividends that allow investors to have a share in the profits of the company. While some people take their dividend payouts or use as income, others choose to reinvest them in the company, buying even more stock to reap even higher dividends, so it’s easy to see why investors like to add companies that pay out dividends to their investment portfolio. But, why do companies choose to pay dividends?
Companies that opt to pay out dividends to shareholders do so to ensure their stock remains appealing to investors, even after growth has slowed down. They cover all their operational expenses, reinvest in their business and then share the remainder amongst their shareholders. Usually, companies that choose to pay out dividends are more mature and longer-established. So, you may be asking why Amazon doesn’t pay out dividends to its investors.
Amazon’s History Of Stock Prices
Since Amazon’s IPO, its share price has increased dramatically by 101,000%. In fact, it has been estimated that anyone who had invested $1000 back in 1997 when the company was first launched on the stock market would now have an investment worth over $1,300,000. So, it comes as no surprise that there is an increasing expectation amongst keen investors that the first Amazon dividend payout will soon be on the horizon.
Should Amazon Pay Dividends?
Unlike a lot of other stocks in the tech sector, the profits Amazon makes are relatively consistent. This means that the company has plenty of cash flow available to cover the costs of paying out dividends. However, companies in their early stages don’t usually pay out dividends to investors and neither do high-growth organizations. Arguably, Amazon falls into both categories.
At the present time, Amazon is a young company in some of its sectors, and it’s certainly growing. Therefore, the online giant in the retail industry still needs to invest its income in its growth so that it can stay competitive against other companies in the same sector. When its profits are reinvested, it can fund research into new ventures, open brand new locations and buy more assets, not to mention access credit much more readily.
How Is Amazon Investing Its Money?
To understand the way in which Amazon is investing its money, it’s important to look first at how the company earns its money. About 67% of the income amazon receives comes from its retail products, and 17% of its net sales by revenue comes from third-party selling via its site. A further 9% is derived from AWS (Amazon Web Services) and the final 5% comes from memberships such as Prime. While this may sound impressive, it’s true that Amazon isn’t actually making a lot of money from the retail side of its business. In fact, it has been reported that this part of its organization is losing money. Essentially, the retail side of Amazon’s business is a loss leader designed to attract customers to its website and then encourage them to sign up for membership. To this end, it has acquired Whole Foods and PillPack and is also now creating new media content in an attempt to attract more subscribers.
Is Amazon Likely To Pay Dividends Any Time Soon?
In short, no, the chances are low. The stock price for Amazon hasn’t been less than 25 times its total earnings in its entire history, so there’s no need to spend the money on attracting investors. Also, Amazon’s growth isn’t likely to slow down any time soon. The company is just launching in a number of different industries and markets and its potential to grow further is huge. So, the chances of Amazon offering dividends to investors in the near future are very low. However, that doesn’t necessarily mean that you should overlook this company in your investment portfolio. Before opening a position, take the time to evaluate the extent of your belief in the future of the company and try your hardest to purchase on a dip. Since Amazon share prices do tend to fluctuate in response to the news, it makes sense to be patient and to buy on one of the company’s downturns.