Q: Why do some companies pay no dividends, and why would anyone invest in them?
A: A company can do several things with its earnings, such as reinvest it in the business, pay it out to shareholders as a dividend, pay down debt and/or buy back shares. (Reducing the number of shares outstanding makes each remaining share worth more.)
Some companies, typically smaller, younger or faster-growing ones, often need to put all their earnings toward growth.
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Struggling companies may reduce or eliminate their payouts, as RadioShack has done. But strong, growing firms with meager or no dividends can still reward you well, as their stock prices advance.
While some investors seek hefty dividend payers, others seek more aggressive growers. A combination can work well, too.
Q: What are “defensive” stocks?
A: Defensive stocks are tied to companies whose fortunes don’t fluctuate too much in relation to the economy.
Food, tobacco, energy and pharmaceuticals, for example, are defensive industries. They’re seen as more stable than their “cyclical” counterparts, such as the homebuilding, steel, automobile and airline industries. Cyclical industries aren’t necessarily to be avoided, but expect some bumpiness.
Shares of Seattle-based Starbucks (Nasdaq: SBUX) advanced about 40 percent in 2013 and have averaged roughly 17 percent annually over the past decade.
With more than 13,000 stores in the Americas already, it’s reasonable to expect U.S. sales growth to slow. But there’s more to Starbucks. For one thing, it has a strong international presence, with much more room to grow. (It boasts more than 19,000 stores in more than 60 countries.)
Starbucks stores in China, for example, have been enjoying robust sales growth. The company opened 317 new stores there in 2013 and plans to open 750 in 2014.
Starbucks is also moving beyond coffee. It now owns and offers La Boulange bakery products, Evolution Fresh juices and Teavana teas. With Teavana, management thinks Starbucks can “do for tea what it’s done for coffee” by growing and expanding the tea industry and the tea-bar concept while introducing a wide array of handcrafted tea beverages.
Starbucks stock offers a dividend yield near 1.3 percent, too.