Stan, there are several reasons for not wanting to pay dividends. The main one comes from investment guru Warren Buffett, who refuses even to consider dividends for his Berkshire Hathaway company. The question is whether a company wants to use its earnings to invest in its own business, buy other businesses it considers undervalued, or pay a dividend, which is the only one of those three alternatives where taxes are owed immediately.
A second reason, particularly for younger companies is that they are strapped for cash and don't have anything extra to pay out as dividends. If your business is growing rapidly, you probably want to do everything possible to keep it growing, without issuing more shares (which dilute earnings) or without borrowing (which leverages the stock). Also, think about the mechanics of paying dividends, especially quarterly dividends. It isn't only the check, but the envelope, dividend notice, postage, and even the special dividend meeting of the Board of Directors. If you own 100 shares, and a dividend of, say, $0.20 per share is declared, you get a check for $20.00 But the cost of the dividend is $20.00 plus all the other ancillary costs, which probably cost another dollar or so for each shareholder, even if the shares are held in street name. Is that a good way to spend money, especially when the dividend itself may be taxable at the same rate as ordinary income?
Assume your tax rate is 30 percent. The company just spent $21 to send you a dividend check, and all you get after taxes is $14. That's why a growing number of companies either pay no dividend or pay just a token amount. And that's also why a stock like SanDisk, or even Intel is not considered very good for widows and orphans. However, if you think about it, there may be much greater risk in holding stocks whose return is eaten away by inflation. That's why I encourage the older people who rely on my advice to put at least a portion of their portfolio into growth stocks.
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