Dividends

Stocks that pay dividends, or will eventually pay dividends, make perfect sense to me. I pay some money to gain partial ownership of this company, which will in turn share its profits with me in the form of dividends. If the company is doing well, other people will want to buy in, and as a result, the share price will increase. Now I can sell my shares for a profit.

If the company isn't paying dividends now, but chooses to reinvest its money, this is fine; it only means that the dividends in the future will be even larger. I might not stick around with the company long enough to receive any of those dividends. But because of the company's growth, people realize that the eventual dividends will be even larger, and demand for the stock goes up, resulting in a higher share price. Now I can sell my stock to somebody else, who will eventually sell it to somebody else, and so on, and so forth, until somebody gets the dividends. It might be 25, 50, or 100 years from now, but as long as somebody eventually gets dividends, it makes sense to me, because the shares have an intrinsic value: present or future profit from the company itself.

Now, suppose we take dividends out entirely. This is how I see it. Suppose companies are actually sealed boxes with cash inside of them. These boxes have the magic power of generating money at varying rates. The boxes are indestructible, so there is no way of breaking them open and getting the money. The magic boxes, just like companies, have their IPO and people can put money into the box to buy shares of stock, which represent partial ownership of everything in the box. The only catch is that you can't actually use the cash that you own, since it's sealed inside the box.

Every year, Box A spits out (just for you) a portion of the money it generated that year, based on how much of the box you own. Since the boxes are always guaranteed to generate money, other people are interested in buying shares, and as a result of high demand, you can sell your shares to them for a profit.

Box B generates money faster than box A, but it won't spit out any money for the next ten years. This is OK, because by the time it spits out money, it'll spit out way more money than box A will. So there's still demand for the stock, and shares appreciate in value.

Box C generates money even faster than box B, but it will never, ever spit out any money to anyone for the rest of eternity. Again, you have no way of breaking open this box and getting the cash that you supposedly own. The cash is legally yours, but you can't use it. Your only hope of making any usable money is selling off your shares to somebody else. The amount of cash each share represents goes up a tremendous amount every day, but again, there is no way of actually getting that cash.

Now, why on earth would anyone put money into box C in the first place, and why would anyone in their right mind want to buy shares of box C?! Do shares of box C have any intrinsic value beyond the paper they're printed on?! If there's never any chance of getting any REAL money from box C, then are the shares really worth anything? Why are people willing to trade with each other for a piece of the pie that nobody will actually get? What happens when the company gets so big that they just can't grow anymore, no matter how much they reinvest?