Quality Stocks That Don’t Pay a Dividend

Many wise investors believe that dividends are the key to long-term investing success. Warren Buffett certainly fits into that category. He doesn’t make big bets on which way a stock will move over the next quarter or even the next year. Instead, he focuses on quality companies that pay dividends.

Buffett knows that as long as a company generates strong cash flow, is consistently profitable, and is not overleveraged, the stock should eventually rebound from any dips or even significant hits. He will sometimes even add to a position if a quality company’s stock takes a significant hit.

This is often where the biggest gains are made and it’s what Buffett means when he is reported to say, “Buy when there’s blood in the streets.”

Key Takewaways

• A dividend is a payment that redistributes corporate profits to its shareholders.
• Some newer companies may choose not to invest profits in growth rather than paying dividends.
• These companies may be attractive to investors who believe that the shares may gain value or pay larger dividends in the future.
• A company that pays too much of its earnings in dividends may not have enough left over to invest in growth.

Understanding Stocks that Don’t Pay a Dividend

There are only two ways to make money in the stock market. There are companies that pay regular dividends to their shareholders, essentially rewarding their owners with a share of the company’s profits. There are stocks that increase in price, giving their shareholders the opportunity to cash in.

The best of the companies that don’t pay dividends are fast-growing businesses that invest all of their profits in new growth and business expansion. They don’t want to devote any of their profits to dividends. But they hold the promise that their investors will achieve a big price gain when they sell shares down the road.

The five companies below generate strong cash flow, have minimal debt concerns, and reported top returns on a three-year annualized basis. All of these are positive signs.

All operate in tech and biotech, which are top areas for growth. The information below should be seen as a starting point for your own research.

Important

Average dividends of blue-chip stocks have declined over time. The average dividend yield of the S&P 500 was less than 1.40% for most of 2024, after averaging about 2.9% for several decades.

Quality Stocks Without Dividends

The chart below includes free cash flow, debt level comparisons, total return, and price to earnings.

Sources: Morningstar Investments/ Yahoo Finance.

Another important factor is that all of the companies listed above can afford to pay a dividend in the future. They might not want to at this point because they’re seeing top-line growth. If any of these companies slow down on the top line and wants to attract more investors in the future, don’t be surprised if a dividend becomes a reality. 

When Do You Have to Buy a Stock to Qualify for a Dividend?

You must buy a stock at least one day before the ex-dividend date in order to receive the next dividend payment. On the ex-dividend date, the company will record the names of all shareholders of record to receive a dividend payment. However, the actual dividend will not be sent out until up to one month later.

How Are Buybacks Different From Dividends?

A stock buyback is when a company buys up its own stock on the open market, thereby raising the value of remaining shares. It is similar to a dividend because both use company profits to reward investors. The main difference is that the gains from stock buybacks are not taxed until the shareholder sells their shares, while dividends are taxed along with other income each year.

What Is a Good Dividend for Stocks?

There are no hard rules for how much a company should pay in dividends, but a healthy dividend should reward investors while leaving enough earnings for the company to remain financially healthy and invest in future growth. As a rule of thumb, a company that pays less than 50% of its earnings in dividends is positioned for financial stability and long-term growth. This metric is called the dividend yield.

The Bottom Line

If you’re seeking slow and steady gains in the stock market, then you might want to consider looking into dividend-paying stocks first. However, if you want to diversify your portfolio a little, then there are strong non-dividend paying companies out there. While this doesn’t always equate to stock appreciation, most savvy and experienced investors focus on the underlying company, not what the stock is doing right now.