Pretty Ugly. Seriously Funny. Act Naturally. They are called oxymoron’s, pairing words that have opposite meanings.
Ever heard of this one: dividend-paying penny stock?
We’ll get to the answer shortly. Let’s clear the air first.
An investor can receive dividends in three forms– cash, stock, and property forms. For example, Whirlpool Corporation announced that it be increasing its quarterly dividend. Whirlpool is paying $1.10 to investors for every share they own.
But why would they do such a thing?
Well, it’s one way to incentivize investors to become shareholders, and stay shareholders. Like a cashback reward credit card: Hey for every 100 shares of Whirlpool you buy, we’ll give you $440 back.
Of course, there are other potential reasons, as well. For example, maybe they don’t see as much growth prospects in the future, and paying out a cash dividend is a good move, strategically.
Heck, The Motley Fool, highlighted the power of dividend income, writing that Warren Buffett earns $6,731 per minute from dividend paying stocks. Older investors are not concerned about growth, their interest lies in preserving wealth into retirement years.
Some juicy dividend paying stocks include:
Company Name Dividend Yield
Exxon Mobil Corporation (XOM): 3.72%
General Electric (GE): 3.25%
AT&T (T): 4.91%
The Procter & Gamble Company(PG): 3.11%
But here’s something real interesting…
Berkshire Hathaway, and its CEO Warren Buffett: don’t offer a dividend payout to its shareholders.
You see, there are always two sides to a story. The money used to pay shareholders can be used for other corporate functions like:
Mergers & Acquisitions
Over the last five years, Facebook has acquired Instagram, WhatsApp, and Oculus VR. With a market cap of more than $400B, it has shown no signs of slowing down. Investors can’t argue with the results, nor should they really care that company doesn’t issue an annual dividend.
Expand into other markets
Investors were surprised in April 2017, when Amazon announced that they would be investing in fuel cell manufacturer Plug Power. Details of the deal state that Amazon will be spending $70M in cash for fuel cell this year, and upwards to $600M over the lifetime of the deal.
Amazon has continued to reward shareholders and grow. Despite having a market cap that surpasses $400B, the company does not issue an annual dividend to its shareholders.
Invest in research and development
Tesla reportedly spends triple what the traditional automaker does on research and development.
And you know what?
It’s paying off. In April 2017, Tesla surpassed Ford in market cap. Remarkable, when you consider the Ford Motor Company has been in business for over 110 years and has been publically traded for over 60 years.
Tesla pays no dividend. However, it’s been able to reward shareholders in other ways.
Hiring new personnel and increasing inventory
With a market cap of greater than $60B, Netflix finds better uses of its earnings profits than to issue out a cash dividend. The company does not play around when it comes to creating original content. In fact, it’s been estimated that they will spend $6B on new shows in 2017.
It has been able to attract A-list talent like: Jerry Seinfeld, Kevin Spacey, Drew Barrymore, Emma Stone.
Now, if any of those options fit for a company. It can buy back company stock. For example, Intuitive Surgical (ISRG) decided to spend $2B on stock buybacks in April, instead of issuing out a dividend.
You see, there are a number of examples of large companies finding ways to increase shareholder value, without having to pay a dividend.
Currently, two of the largest companies in the world, Google and Berkshire Hathaway don’t offer dividends to its shareholders. On the other hand, Apple Inc. continues to show growth potential, while still being able to pay a $0.57 per share, quarterly, to its shareholders.
But what about penny stocks, are blue chip companies the only ones who distribute dividends? After all, most of them are in developmental or growth stages. Surely, they can find other uses, than issuing out a dividend… right?
According to data collected from finviz.com, there are 135 microcap (under $300M in market cap) companies that pay out a dividend that yields 5% or more annually.
In theory, it sounds like the best of both worlds: earning passive income, and owning a stock that has future growth potential.
Clearly Confusing– to say the least.
However, you should be skeptical about small companies issuing out dividends. It should attempt to exhaust all possible options before going that route.
Dividends should not be the only reason to buy a small cap stock.
For example, Air Industries Group, a small cap company, offers an attractive dividend yield of 17%. However, with a market cap of under $30M, it has struggled to provide further value to shareholders. In fact, on April 19th, 2017 it received a receipt of a listing deficiency letter from the NYSE.
Is dividend paying penny stock an oxymoron?
It’s not black and white. But if you need an answer, then it’s YES.
Look, there is only so much growth companies, like Exxon and AT&T, can have, and issuing out a dividend makes sense for them. However, if you’re a small cap company and your best use of capital is to issue out a dividend– well that should be a red flag. If the largest companies in the world can find ways to innovate and grow, then small-cap companies should get creative instead of issuing out a dividend.