All other things about two companies being equal, you should prefer to own the one that doesn’t pay a dividend.
As outlined in my previous post , the only factors that will move the value of your stocks are earnings, enthusiasm, and shares outstanding.
The earnings and enthusiasm determine the size of the pie (a company’s market cap). Shares outstanding determine the size of your slice of the pie (the percentage of the company you own).
The size of the pie and the size of your slice are really the only things you should care about.
Dividends are earnings paid out to shareholders. The amount issued often coincides with an equal drop in share price. For example, if a company issues a dividend of $1 per share, the share price of the stock typically also falls by $1. How this happens is important though.
For the company to pay you, they must realize earnings. This is bad because they have to pay taxes. When you receive the money it is considered income. This is bad because you have to pay taxes.
In terms of pie, the pie is the same size and your slice is the same size. But you had to pay taxes just to keep the same size slice of pie you had before. And the company had to pay taxes too.
The alternative to a dividend would have been earnings left unrealized, you not paying taxes to keep your same stake in the company, and the company being able to reinvest the earnings into the business as an expense (tax-free) to more rapidly grow future earnings.
I get it. Dividend investing seems exciting because theoretically if you have enough shares, the dividend payout alone can pay your bills, and you never have to sell your shares, allowing you to keep the same stake of your companies.
But it doesn’t work that way. Since the company creates more shares when it issues a dividend, you have to reinvest the dividends in order to keep the same percentage of the company. By living off your dividends you are losing ownership of your companies.
Additionally, owning dividend paying shares in taxable accounts during your paycheck-earning years means you pay more taxes overall. The alternative of realizing those capital gains in your non-paycheck-earning retirement years would be lower taxes since you aren’t earning a salary at the same time.
What should you chase then? If the above scenario was appealing to you, then the closest thing to that is a company that reduces the number of shares outstanding.
When a company reduces the number of shares outstanding via stock buybacks, the percentage of the company you own gets larger without you doing anything. And you don’t have to pay taxes on this capital gain until you want to — letting all of the appreciation of your stocks compound tax free until you sell in your non-paycheck earning years.
Even before share buybacks, you should be prioritizing earnings growth above any other factor assuming you aren’t paying too much of a premium for it.