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Dividendless stocks

Ask the Fool

Published: June 6, 2023

Q. Why don't some companies pay dividends? Should I avoid such companies? -- S.P., Opelika, Alabama
A. When companies earn money, they can spend it paying down debt, reinvesting in the business or paying a dividend -- among other options. Younger, smaller companies typically want to use all the money they can to further their growth, and their earnings may not be consistent enough for them to commit to a dividend. Plenty of large companies -- such as Tesla, Netflix and PayPal -- also don't pay dividends.
Dividends can help your portfolio grow, but you can also profit from dividendless stocks, if they're tied to strong and growing companies whose stock increases in value over time.
Q. What's a leveraged buyout? -- T.C., Mansfield, Ohio
A. Often referred to as an LBO, a leveraged buyout is when one company buys another, doing so with a lot of borrowed money and very little of its own money -- often just 20% to 30% of the purchase price, though it can be as little as 10%. (Investments made using a lot of debt can enjoy amplified gains, but there's a risk of amplified losses, too.)
The acquired company may be taken "private," meaning that it will no longer trade as a stock on the open market. Then the new owners may cut costs, perhaps by selling off some assets or laying off part of the workforce, before bringing the company public again. The new owners may also just split up the company, spinning off various businesses.
LBOs aren't always welcomed by their targets and don't always end well for the company or its shareholders -- there are substantial interest payments due, after all, and morale can be low. Acquirers, though, often profit.
Fool's School
Moneymaking Ideas for Teens
Teens hoping to earn money this summer are in luck, because the national unemployment rate was just 3.5% in March, meaning that jobs shouldn't be hard to find. Below are some ideas for young people. (Don't assume it's too early to pursue a summer job now. Some good ones might get filled soon.)
-- The usual suspects: Check with local supermarkets, retailers, restaurants and movie theaters to see which ones are hiring. Babysitting or lawn mowing can be lucrative if you can line up enough jobs.
-- Strategic choices: Think about possible careers that interest you, and see if you can find a job related to one. For example, you might find work at a hospital, law office, veterinary practice, plant nursery or bicycle store. If there are companies nearby that you greatly admire, you might see if they hire summer interns.
-- Follow your interests: If you love animals, you might find some pet-sitting or dog-walking work. If you love being outdoors, you might pursue being a camp counselor, golf caddy or farmhand. If you enjoy helping older people, maybe you can do some tasks, such as shopping, for elderly neighbors.
-- Use your skills: If you're good at a subject like math or science, you might tutor other young people. Perhaps you might also offer language or music lessons.
-- Be an entrepreneur: If you have some hustle in you, perhaps start a small business. Advertise your availability to do landscaping work, to troubleshoot neighbors' computer problems or to sell unwanted items online (such as on eBay) for a cut of the proceeds. If you're savvy with social media, you might offer your services to help local businesses reach more customers.
Teens (and clever preteens) can learn a lot about how to make money in our book, "The Motley Fool Investment Guide for Teens: 8 Steps To Having More Money Than Your Parents Ever Dreamed Of," by David and Tom Gardner with Selena Maranjian (Touchstone, $17).
My Smartest Investment
Doubled My Money in Three Months
I think my smartest investment happened many years ago, when I sold my shares in companies such as Kmart, Philip Morris and Columbia/HCA at a small loss and moved all the proceeds into Sun Microsystems. I doubled my money in about the first three months! -- M.S., Mission, Kansas
The Fool responds: That definitely turned out to be a solid move.
Looking back now, Kmart merged with Sears in 2004, and Sears Holdings filed for bankruptcy protection in 2018. Meanwhile, in 2000, Columbia/HCA agreed to plead guilty to defrauding Medicare and Medicaid; the fines and damages totaled $1.7 billion -- one of the largest health care fraud settlements in United States history. Now called HCA Healthcare, it's chugging along. So is Philip Morris, though challenged by declining global cigarette smoking rates.
We do wonder how long you held on to your Sun Microsystems stock, because it ended up struggling in the 2000s, in part due to the rise of open source software. It was bought by Oracle in 2010 for $7.2 billion, in a deal that was later described by some as one of the worst acquisitions in history.
If you had lost faith in the stocks you sold, selling them was the right move. So was buying into Sun Microsystems, if you had great faith in it. We hope that you followed its progress and sold your shares (preserving your gains) when signs of trouble emerged.
Foolish Trivia
Name That Company
I trace my roots to the 1923 founding in Boston of the Special Yarns Corp., which made $75,000 in its first year. In the 1940s, I made parachutes for the military and took on my current name. I started expanding my scope in later years, acquiring various nontextile businesses, such as a maker of golf carts and a helicopter manufacturer. I'm now based in Providence, Rhode Island, and my market value was recently near $14 billion; I rake in nearly $13 billion annually. My brands include Bell, Cessna, Beechcraft, Pipistrel, Jacobsen, Kautex, Lycoming, E-Z-GO and Arctic Cat. Who am I?
Last Week's Trivia Answer
I was founded in 2010 by a fellow who had started out selling windsurfing and snowboarding equipment. After turning his focus to buying brands and licensing them, he built me into a big business, with annual revenue near $25 billion. My offerings are sold in more than 10,500 stores, and my lifestyle, entertainment and media brands include Reebok, Eddie Bauer, Frye, Tretorn, Nautica, Izod, Brooks Brothers, Barneys New York, Juicy Couture, Lucky Brand, Aeropostale, Forever 21, Nine West and Jones New York. I'm privately held at the moment, so you can't buy shares of me through your brokerage. Who am I? (Answer: Authentic Brands Group)
The Motley Fool Take
Products People Can't Do Without
Vertex Pharmaceuticals (Nasdaq: VRTX) markets therapies that people can't do without. Even better: It doesn't have any competition. There are no approved drugs that treat the underlying cause of cystic fibrosis (CF) aside from the four produced by Vertex.
This near-certainty of revenue, regardless of how the economy performs, makes Vertex largely recession-proof. But the stock should deliver impressive returns even if a recession doesn't arrive. In addition, Vertex thinks that it could have five new product launches over the next five years.
All eyes right now are on exa-cel, a gene-editing therapy that awaits regulatory approvals for use in two conditions -- sickle cell disease and transfusion-dependent beta-thalassemia. Next year, Vertex could also file for approval of non-opioid acute-pain drug VX-548, and a new triple-drug CF combo.
That's not all, though. Vertex's pipeline also features inaxaplin, which is in a pivotal trial for treating APOL1-mediated kidney disease. In addition, the company has a promising treatment that could potentially cure Type 1 diabetes, now in early-stage testing.
With its strong CF franchise and multiple shots on goal, Vertex seems poised to be a strong performer over the long term. (The Motley Fool owns shares of and has recommended Vertex Pharmaceuticals.)