Why doesn't Amazon pay a dividend?

Why doesn’t Amazon pay a dividend?

For years, investors may have been hesitant to buy Amazon (NASDAQ: AMZN) share because of its very high price. But earlier this year, Amazon made the decision to split its stock, making the stock more affordable for investors.

If you’re looking to add a tech stock to your portfolio as a means of diversification or want to own Amazon, you might want to consider making the jump now that the price per share is lower. But one thing you won’t get when you invest in Amazon is a stream of dividend payments.

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While many companies that issue stock regularly pay dividends (some even steadily increasing their dividends over the years), Amazon does not pay dividends to shareholders. But that’s not necessarily a bad thing.

Why Amazon Doesn’t Pay Dividends

Businesses that make money can choose what to do with it. Some might choose to reinvest all of their profits back into the business, while others might choose to share the wealth with shareholders in the form of dividend payouts.

Neither approach is right or wrong – it’s really a matter of which strategy a given company prefers. Amazon’s business model has long focused on innovation and diversification into different corners of the market, as evidenced by its foray into the grocery and pharmacy sector in recent years. As such, it’s easy to see why Amazon doesn’t choose to pay dividends — it prefers to use its money to grow as a business.

Whether that’s a reason not to invest in Amazon is up to you. If your goal is to ensure a steady stream of dividend income into your portfolio, then Amazon is clearly a poor choice. But if you’re willing to ignore that missing dividend and focus on growth, you may decide Amazon is a buy.

One thing to keep in mind is that companies that pay generous dividends don’t always experience the same growth as those that don’t. So what you lose in the form of absent dividend payments, you could gain in the form of stock price appreciation, especially if you load up Amazon stock now and hold it for many years.

Look at the big picture

Some investors get caught up in the dividend-hunting process, to the point of investing their money in companies that don’t necessarily fit their portfolios. Additionally, some people confuse higher dividend payouts with a sign of financial health. This is certainly not always the case. If you’re interested in owning a piece of Amazon and, after doing your research, think it’s a solid business, then the company’s lack of dividend payments shouldn’t be the determining factor that prompts you to transmit it.

Dividends are definitely a good thing to have since you can use them as cash or reinvest them. But you can make a lot of money over time by investing in quality companies, like Amazon, with growth as your top priority.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Maurie Backman holds positions at Amazon. The Motley Fool holds positions and recommends Amazon. The Motley Fool has a disclosure policy.

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