Stocks provide a return to today’s investors via two mechanisms: dividends and capital gains.
Dividends provide and income stream which can be qualitatively values. Capital gains result from speculation — an expectation that future dividends will be higher than the market currently expects.
But what’s the value of a company that continuously pays no dividends and does not appear as if it ever will in the foreseeable future?
Former financier and current statistician Tan Liu, author of the recent book The Ponzi Factor: The Simple Truth About Investment Profits explains how many of today’s perpetually dividend-less companies traded on the public market are operating as ponzi schemes by definition.
As a result, a substantial amount of the market capitalization of our stock market is actually “phantom wealth” that doesn’t truly exist. It will vaporize during the next financial crisis as investors prioritize cash flows in-hand over the promises of starry-eyed CEOs.