Dividendless Stocks

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.

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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.