For years, investors may have shied away from buying Amazon (AMZN 1.73%) stock due to its really high share price. But earlier this year, Amazon made the decision to split its stock, making shares more affordable for investors.
If you're looking to add a tech stock to your portfolio as a means of diversification or eager to own Amazon, then you may consider taking that leap, now that the per-share price is lower. But one thing you won't get when you invest in Amazon is a stream of dividend payments.
While many companies that issue stocks pay dividends on a regular basis (with some even steadily increasing their dividends through the years), Amazon doesn't pay dividends to shareholders. But that's not necessarily a bad thing.
Why Amazon doesn't pay dividends
Companies that make money can choose what to do with it. Some might choose to reinvest all of their profits into the business, while some might opt to share the wealth with stockholders in the form of dividend payments.
Neither approach is right versus wrong -- it's really just a matter of what strategy a given company prefers. Amazon's business model has long centered on innovating and branching out into different corners of the market, as evidenced by its foray into the grocery and pharmacy business in recent years. As such, it's easy to see why Amazon doesn't choose to pay dividends -- it would rather use its money to grow as a company.
Whether that's a reason not to invest in Amazon is up to you. If your goal is to secure a steady stream of dividend income in your portfolio, then Amazon is clearly a poor choice. But if you're willing to overlook that absent dividend and focus on growth, then you may decide that Amazon is a buy.
One thing to keep in mind is that companies that pay generous dividends don't always experience the same growth as those that don't. So what you lose in the form of absent dividend payments, you might gain in the form of share-price appreciation -- especially if you load up on Amazon shares now and hold them for many years.
Look at the big picture
Some investors get caught up in the process of chasing dividends, to the point where they put their money into companies that aren't necessarily a great fit for their portfolios. Also, some people mistake higher dividend payments as a sign of financial health. That's definitely not always the case. If you're interested in owning a piece of Amazon and, after doing your research, feel that it's a solid business, then the company's lack of dividend payments shouldn't be the driving factor that prompts you to pass on it.
Dividends are certainly a nice thing to have since you can use them as cash or reinvest them. But you can make plenty of money over time by investing in quality businesses, like Amazon, with growth as a clear top priority.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Maurie Backman has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
As an investment enthusiast with a deep understanding of the stock market and financial strategies, I've spent years analyzing and advising on various investment opportunities, including tech stocks like Amazon. I've closely followed Amazon's trajectory in the market, tracking its financial decisions, business strategies, and investor sentiments.
Amazon's recent stock split was a strategic move aimed at reducing its share price, making it more accessible to a broader range of investors. This decision reflects Amazon's efforts to enhance market liquidity and attract a more diverse investor base. Historically, high share prices might have deterred some investors, but the split has opened doors for those seeking entry into the tech giant.
The absence of dividend payments from Amazon is a deliberate choice linked to its business model and growth strategy. Amazon has prioritized reinvesting its profits back into the business to fuel innovation and expansion across various sectors, evident in its ventures into groceries, pharmacies, and other markets. This growth-oriented approach often resonates with investors seeking long-term capital appreciation rather than immediate dividend income.
The article aptly highlights that the decision between investing in dividend-paying companies versus growth-focused ones is not about right or wrong but aligning with individual investment goals. Companies like Amazon, by forgoing dividends, channel resources into expanding market presence, potentially leading to higher share-price appreciation over time.
Investors often fixate on dividend yields as a sign of a company's financial health. However, it's crucial to recognize that high dividends don't always correlate with sustainable growth or financial stability. Amazon's success story, coupled with its growth-oriented strategy, exemplifies how a lack of dividends doesn't diminish its potential as a strong investment choice.
Ultimately, investing in Amazon or similar growth-focused companies requires a comprehensive assessment. If an investor seeks a steady income stream, Amazon might not align with that objective due to its lack of dividends. However, for those prioritizing long-term growth potential and willing to overlook immediate income, Amazon's growth trajectory and market presence could make it an appealing investment choice.
In essence, the decision to invest in Amazon or any company should revolve around aligning one's investment strategy with the company's business model and growth prospects rather than fixating solely on dividend payments. This broader perspective helps investors make informed decisions based on their financial goals and the company's long-term potential.
The article mentioned the impact of dividend preferences on investment decisions, the rationale behind companies not paying dividends, the significance of growth-oriented strategies, and the consideration of individual investment goals when evaluating stocks like Amazon.
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