Dividend stocks play an important role in many investor portfolios. These cash payments are made on a regular basis to shareholders and provide a way for investors to share in a company’s profits.
Some people use them for income, while others reinvest them, buying more stock and reaping more dividends. It adds up. According to Santa Barbara Asset Management, some 42% of the returns the S&P 500 has generated since 1930 come from dividends.
Companies pay dividends to make their stock more attractive to investors after growth slows. They cover their operating expenses and reinvestment a little in the business, then they spread the love to their shareholders. These companies are normally more established or mature.
Does that sound like Amazon [NASDAQ: AMZN] to you?
Amazon Stock Price History
Amazon’s share price has swelled 101,000% since its IPO so many years ago.
According to CNBC, “If you had invested $1,000 during Amazon’s IPO in May 1997, your investment would be worth $1,362,000 as of September 4,” 2018 – and the company has grown even more since then.
As of March 1, 2019, Amazon’s share price had a 52-week range of $1307.00 to $2050.50. Analysts put the one-year target estimate at $2075.74 for the company.
Should Amazon Pay a Dividend?
Unlike many other tech stocks, its profits are fairly consistent, and it has enough free cash flow to cover the cost. However, early-stage companies don’t pay usually dividends. Nor do high-growth companies. Amazon is a little of both.
Amazon is still young in some of its industries and it is definitely growing.
The online retail giant needs its income to invest in growth and remain competitive against the pantheon of companies it competes against.
Also, retaining earnings could help Amazon [NASDAQ: AMZN] access credit more readily.
How Does Amazon Invest Its Money?
To understand how Amazon invests its money, let’s start by looking at how the retail giant makes its money.
Around 67% of Amazon’s income comes from the retail products it sells, while 17% of the company’s net sales by revenue is from third-parties selling through its site.
Another 9% comes from Amazon Web Services (AWS), which Capital One [NYSE: COF], Adobe, Dow Jones, Vodafone, Conde Nast, Comcast, and Kellogg counts amongst its clients, and 5% comes from Prime and other memberships.
That sounds impressive, but the truth is that Amazon [NASDAQ: AMZN] isn’t making much money from its retail business. The Street reports that this segment is actually losing money.
In 1Q18, “Amazon reported $1.9 billion in net income on $51 billion in revenue for the quarter, and that is only a 3.7% profit margin, but it gets worse when you separate out AWS (Amazon Web Services) and Prime from the retail side of the business,” writes The Street.
“However, if we back out the AWS numbers from the overall results, we are left with $45.6 billion in revenue and $500 million in earnings.
Margins outside of AWS then shrink to 1%, but retail is actually worse than that.” The Street estimates that Amazon lost around $2 billion that quarter, if you don’t count Prime and AWS.
Basically, Amazon’s retail business is a loss leader to attract people to its site and entice them to membership. To that end, Amazon has been upping its ante with its Whole Foods acquisition as well as its purchase of online pharmacy company PillPack. The company is also creating media content to further attract subscribers.
Is an Amazon Dividend Payment Likely?
No. It’s not.
Amazon’s stock price has never been less than 25 times its earnings – not in the entire history of the company. It doesn’t need to attract investors, so why spend the money?
It also doesn’t look like Amazon is slowing down anytime soon. Bezos seems to be on a mission to conquer the entire capitalist world.
His company is just getting started in so many different markets and industries – including grocery stores – that the potential for growth is exponential. Moreover, Amazon has the ability to shift its investments as demand is realized.
Some aspects of the company, like its web services and its marketplace, are self-sustaining. AWS lets companies of all sizes leverage the cloud on an as needed basis.
Unless Amazon messes up, there is no reason for its customer companies to switch teams. The marketplace is no different. As long as people turn to Amazon, businesses will want to sell their products there.
Amazon Stock Dividend: The Bottom Line
It is unlikely that Amazon [NASDAQ: AMZN] will offer a dividend anytime soon, but that doesn’t mean the company doesn’t deserve a place in your portfolio. While investing in the online marketplace giant won’t be right for every investor, Amazon [NASDAQ: AMZN] could be part of a successful investing portfolio.
Before you open a position, make sure to evaluate how much you believe in the company’s future and do your best to buy on a dip. Share prices for this company do flex quite a bit in response to different news. Being patient and buying on a downturn is smart.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.