As a self-proclaimed “Dividend Growth Investor” (DGI), I firmly believe the best path to success in the stock market is to focus on cash flows by investing in high quality dividend paying companies. As dividends rise and are reinvested, returns compound for the patient investor.
The best dividend growth companies on the market tend to be entrenched names within mature industries. When I think of solid dividend stalwarts, names such as The Coca-Cola Co (KO) and Toronto-Dominion Bank (TD) come to mind. Both of these companies have a strong track record of increasing the returns they send to shareholders year in and year out. They have carved out a healthy market share within their respective industries and produce reliable cash flows.
While I have touted the benefits of dividends many times before as it relates to achieving my goals, today I would like to open the discussion as to what’s missing from a dividend-only approach.
Why Invest In a Non-Dividend Payer?
When a company is growing at a very high rate, it often makes sense to funnel all earnings back into the company to finance growth. For companies that can find effective uses for every extra cent the company generates, this makes sense.
In other words, it is only at the point that a company can no longer find a productive use for extra profits that they should decide to send some directly into the hands of investors via paying a dividend.
In today’s world, there are few better examples of a company firing on all cylinders to grow than Amazon.com Inc. (AMZN). Having just announced its Fourth Quarter Results on January 28, a few highlights include net sales rising 22% from Q4 2014, $100 billion in annual sales, and a customer base of 300 million. Few companies come anywhere close to achieving this level of execution.
The exciting part about AMZN is that, as I just noted, the company is actually still growing at an incredible clip. As a consumer, it is very easy to see why AMZN’s business model works; the website is incredibly easy to navigate. It is simple to find what I am looking for and they have an incredibly efficient ordering process which means customers don’t waste time fumbling around at checkout.
In other words, AMZN has figured out how to get things done online: Let people find what they want and allow them to pay in uncomplicated fashion. No other website I’ve ever shopped with online does this better.
Naturally, with the astronomical growth rate AMZN has achieved, the company does not pay a dividend. In fact, while founder Jeff Bezos of course does want to generate profits, he has a greater focus instead on achieving total global domination. By driving down prices on the wares AMZN offers, the company is seeking to improve its bottom line by making small margins on huge volume rather than big margins on lower volume.
The Bottom Line: Would I Invest In AMZN?
This is the question I have been juggling with for the past few years. AMZN is the undisputed leader in its industry; when the average person thinks eCommerce, AMZN is the name that comes to mind. They’re the big dog that everyone is (unsuccessfully, thus far) chasing. However, without a dividend to draw me in, I’ve been on the sidelines while the stock has steadily risen.
What’s interesting at this point in time is that AMZN has actually pulled back around 30% since late December. How far down it might go from this point is anyone’s guess and I don’t intend to waste any energy on that.
Still, I am wondering whether this may provide just the opportunity I have been waiting for to just nibble a bit and get my feet wet on this company. It would be the first time I’ve invested in a company that doesn’t pay regular cash flows to investors.
An investment in AMZN would serve to hedge investments I’ve made in old-world retail via my stakes in RioCan Real Estate Investment Trust (REI.UN) and Wal-Mart Stores, Inc. (WMT). I have significant stake in the way shopping has been done, ultimately, since shopping even existed. Namely, the customers goes to a physical store and shops for what is available, buys it, and leaves.
With new-world shopping, people take a second or two to search online and then have the parcel delivered to their door. This version of shopping has, looking out a few decades, a real chance to decimate the old paradigm.
I believe that, despite the lack of a dividend, AMZN warrants a stake. However, with the USD being so expensive relative to my Canadian funds, I will be interested in making an AMZN purchase subject to the availability of USD in my portfolio; as my American companies pay me some dividends, I will likely put some of them to work with AMZN.
Thank you for reading.
– Ryan
Would you invest in a company that doesn’t pay a dividend? Which have you?
Full Disclosure: Long KO, TD, REI.UN, WMT
Pictures courtesy of pixabay.com
