Why Own The Stock Of A Large Company?

Why does anyone own (or invest in) a company?

Some people start a business to have control over their work schedule or career while others invest in a business to do good things or help a family member out. There are hundreds of answers to the above questions and I don't intend to go through them all (because I can't and who cares about all the reasons!?!). We all have our own reasons. As an investor, the only reason I would want to own (or invest in) a company is if it's able to provide positive returns on my investment or if the business is being used to do good. Nothing new here.

I've noticed that many successful private business owners are often looked upon with envy by those who are lower on the financial totem pole. Ordinary citizens look at business owners and assume they aren't just being paid for their work in the company, but a portion of profits (if its a profitable company) as well. This is often true if its a profitable company that isn't in its early rapid expansion stages where every dollar of profit gets reinvested.

Now the problem I've noticed is that many of those same ordinary citizens have stock portfolios that are invested in large profitable companies that don't even offer a dividend or else the dividend is extremely small! Many stock investors look at their portfolio's differently than they look at those who own a private company – but both are investments in corporations. If a profitable mature company isn't paying a dividend, then the investor must believe the company will continue to grow the intrinsic value of the company quickly by reinvesting the profits for growth. I don't think I could EVER invest in a large cap company that doen'st provide some dividends to its owners. For a large cap to continue to grow at double digit rates year in and year out, is extremely difficult (at least on a consistent basis). Let's face it, it's much easier to grow a $50 to $100 million market cap company at 20% a year for five or ten years than it is for a $200 billion market cap company.

I'm not against investing in a company that doesn't offer dividends, so long as that company is either undervalued or in a high growth stage. There are different reasons to invest in a company and you MUST know why you invested in a particular company. It amazes me how many people don't really know why they invested in a particular company. It also amazes me how many investors forget they are partial owners of a company – It's not just a stock ticker that goes up and down. You are actually buying a portion of a COMPANY.

It seems to me that profitable public companies are treated different than profitable private companies. If you owned a profitable private company, you would almost undoubtedly give yourself some dividends since it's often a lower tax rate than capital gains and an efficient way to get cash out of a corporation. But some public corporations that are profitable and large do not give out dividends. Another interesting thing to note is the high valuations on many public companies. If you go and look at the valuations for private companies, they are often much lower (hint: Some investors with a few million might be better off looking into investing in private corporations if the valuations are good and a solid management team is in place, though it certainly isn't for everyone!). Now, there are some benefits of stock ownership in a public company – namely that fact that you can buy and sell whenever you want (you have to love liquidity!) and you don't have to worry about managing the company (though you better vote and know the management team). But we often pay a premium for this hands-off convenience.

But I'm (as usual) getting off track. Damn my scatter brain. Why invest in a large company on the stock market? If you're reaching the age of retirement, your investments should have a focus on generating income so you don't have to start dipping into the value of your portfolio. Not every year will the stock markets or your portfolio go up. Dividends offer some income without forcing you to sell shares of a company. Dividends are often taxed at a lower tax rate than capital gains and is a more efficient way to get cash out of a corporation. If your young your reasons to invest will differ and will be focused on growing the portfolio as rapidly as you safely can. That may sometimes mean investing in high yielding dividend stocks depending on what the opportunities are. Regardless, dividends from a portion of the company profits can play an extremely important role in the long term performance of your portfolio so long as the dividend doesn't come at the cost of the company's long term sustainability.

I believe that owners (or investors) of a profitable company are entitled to a percent of profits if it's a mid to large cap (which doesn't have the same growth potential as a small cap). That doesn't mean I want every penny of profit to be paid out in dividends – growth is good, I just like to see management be more efficient and not waste money. If you give management too much money to work with they may get lazy. If that same management team had 10% less money to work with but still needed to reach the same target growth rates in order to receive their despicable and insanely large bonuses, I think they will work their tails off and maybe actually deserve some of their bonuses… Make them earn it.

I like the fact that I can easily tell what my return will be by looking at the dividend yield. There are no guarantee's that dividend will continue, but there aren't many guarantee's in life. But why be an owner of any large company if you aren't entitled to a percent of the profits through a yearly dividend? For a mid to large cap company, if the management team is worth those big dollars we pay them, they should be able to give us investors a mix of dividends and company growth and anything less just isn't good enough (especially when you look at their salaries!). So don't expect less. And remember, in the next twenty years, stocks that offer dividends will probably do MUCH better than stocks that do not due the the large number of people that will be entering retirement and putting their portfolio dollars to work generating dividends.