What Do Facebook Shareholders Get in Return When There Are No Dividends?

Facebook, the social media giant, has been a popular investment choice among shareholders since its initial public offering (IPO) in 2012. One common question frequently arises: what do shareholders receive in return for their investment when the company chooses not to distribute dividends?

Stock Price Appreciation

For many shareholders, the most tangible benefit of owning Facebook stock is the significant appreciation in its stock price. Let’s take a look at a real-world example. After purchasing Facebook stock during its IPO at $38.00 per share in 2012, a shareholder could have seen an impressive growth of over 500%—the stock price is now over $200 per share as of 2023.

Another illustration of this phenomenon is evident when considering the performance since the stock hit its lowest point in October 2012 at around $38.00. For those who bought in early 2016, the stock has appreciated more than 500%. This represents a substantial return on investment, well exceeding any paltry dividends received from other stocks.

Comparing Facebook’s Performance to Dividends

A comparison of Facebook's stock appreciation against the dividends received from other companies highlights the significant value that can be extracted from capital growth. Take, for instance, a stock with a relatively low dividend yield of 2%. Over a period of years, an investor receiving these dividends would have seen limited growth compared to the potential earnings from a 500% stock appreciation rate.

The chart above from Yahoo Finance demonstrates the exponential growth of Facebook's stock price over the years. This growth alone represents a considerable return for shareholders, far surpassing the income generated from dividends.

Generating Additional Income with Covered Call Options

For shareholders looking to generate additional income from their Facebook shares, selling covered call options can be a strategic move. A covered call is a financial strategy where a shareholder sells call options on their owned stock and retains the underlying shares. This strategy can provide a steady stream of cash flow, in addition to the potential of capital gains.

Here’s how it works: an investor with a 100-share holding in Facebook might sell a call option with a strike price of $220, expiring in six months. If the stock price remains below $220 by the expiration date, the investor keeps the premium (the income from selling the option) and keeps the shares. If the stock price rises above $220, the call option is exercised, and the investor sells their shares at the strike price, providing a guaranteed sell price for the stock and a profit from the premium received.

By using covered call strategies, shareholders can enhance their returns even without dividends, creating a more balanced investment portfolio that incorporates both capital appreciation and income generation.

Conclusion

In the absence of dividends, Facebook shareholders have the opportunity to benefit from significant capital appreciation, as well as alternative strategies like covered call options to generate additional income. The long-term performance of Facebook's stock has provided a highly lucrative return for investors, showcasing the power of a well-performing market stock over a dividend-focused investment approach.