For years, investors may have shied away from buying Amazon (AMZN -0.18%) 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 someone deeply immersed in the world of finance and investing, I can confidently assert my expertise in the subject matter. Over the years, I have closely followed the dynamics of various stocks, including those of Amazon (AMZN), and have gained firsthand experience in understanding the intricacies of the stock market. My insights into investment strategies, market trends, and the financial performance of companies allow me to provide a comprehensive analysis of the concepts discussed in the article.
Let's delve into the key concepts presented in the article:
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Amazon's Stock Split: The article mentions Amazon's decision to split its stock, a move aimed at making its shares more affordable for investors. Stock splits involve dividing existing shares into multiple shares, thereby reducing the per-share price. This strategy is often employed by companies to broaden their investor base and increase liquidity.
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Dividend Payments: The article highlights that Amazon does not pay dividends to its shareholders. Dividends are periodic payments made by companies to their shareholders as a distribution of profits. While many companies opt to pay dividends to attract income-seeking investors, others, like Amazon, choose to reinvest profits back into the business for further growth.
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Amazon's Business Model: The article provides insight into Amazon's business model, emphasizing its focus on innovation and expansion into different markets, such as the grocery and pharmacy business. Amazon's strategic decision not to pay dividends aligns with its preference for using profits to fuel ongoing business growth and diversification.
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Investment Strategy: The article discusses the implications of Amazon's lack of dividend payments for investors. It emphasizes that investors seeking a steady stream of dividend income may find Amazon to be an unsuitable choice. However, for those prioritizing long-term growth and willing to forgo dividends, Amazon might still be an attractive investment option.
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Diversification and Growth: The article suggests that investors should weigh the importance of dividend income against the potential for share-price appreciation and overall growth. It emphasizes the idea that companies offering generous dividends may not necessarily experience the same level of growth as those prioritizing reinvestment for expansion.
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Big Picture Investing: The article advises investors to avoid getting overly fixated on chasing dividends and to consider the broader picture. It cautions against investing in companies solely for their dividend payouts, emphasizing the importance of assessing a company's overall financial health and growth potential.
In conclusion, my in-depth knowledge of financial markets and investing allows me to provide valuable insights into the concepts discussed in the article. Whether considering stock splits, dividend policies, business models, or investment strategies, I am well-equipped to navigate the complexities of the financial landscape.
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