5 ms·

You can make money by buying a stock, having the business get more valuable so the stock goes up, and selling the stock at a higher value. Or you can make money

You can make money by buying a stock, having the business get more valuable so the stock goes up, and selling the stock at a higher value. Or you can make money by buying a stock, having the business make money and pay it out to you in dividends. At the end of the day, what matters here is how much money you make and how long it took you to get it, which is a function of sell price - buy price + dividends received - transaction costs and taxes paid. This chart ignores the dividends received part, and thus misrepresents the value of the stock. I don't know how big the dividend is so I don't know by how much. I doubt it would really make -50whatever% a whole lot better, but it would certainly be something better. Traditionally dividends are generally paid out by businesses that can't reasonably expect to use their cash to grow - reinvesting all your cash to grow may not make sense if your growth is limited by geography or by completely owning an entire market. The textbook example is a utility company.

stock_toaster 15y ago
Correct me if I am wrong, but I believe an additional benefit is that the tax rate on dividends is substantially lower than that of capital gains.
- dirtae 15y ago
  You're wrong. The long term capital gains tax rate in the U.S. is 15% for most people. The tax rate for "qualified" dividends (essentially, dividends on stock that you've held for awhile) is 15%. Starting in 2013, dividends will be taxed at your ordinary income tax rate (which is the way they used to be taxed), while long term capital gains will be taxed at 20%, which means that for most people, dividends will be more highly taxed than long term capital gains.
  - stock_toaster 15y ago
    Ah. Thanks for the correction. The information I had must have been dated, looking here[1] it does appear that my information was old (probably from the 2003-2007 timeframe). I could have also been misremembering, and in fact the original data was probably comparing income tax to dividends tax. Good thing I am not an accountant! It does seem that recent changes have again adjusted the tax rate. In fact, based on more information[2], it seems long term capital gains tax is in fact lower (while short term is the same as dividend tax). [1]: https://secure.wikimedia.org/wikipedia/en/wiki/Dividend_tax#United_States https://secure.wikimedia.org/wikipedia/en/wiki/Dividend_tax#... [2]: https://secure.wikimedia.org/wikipedia/en/wiki/Capital_gains_tax_in_the_United_States https://secure.wikimedia.org/wikipedia/en/wiki/Capital_gains... (updated for formatting)
wonnage 15y ago
Even a company that's growing ought to pay dividends in most cases. After all, if your shareholders have faith in continued good business they have the option of reinvesting their dividends. Companies that don't pay out are essentially telling you that your money's better off in the company, which strikes me as a rather arrogant way to treat your owners.
- akronim 15y ago
  Dividends are basically saying "we're returning earnings because you can probably invest them better than we can". It's up to the investor balance their portfolio and decide how much money they have invested in the company, dividends are supposed to be that mechanism.
  - wonnage 15y ago
    Sure, and as a shareholder I can say that I always know better. In reality I probably don't, but it's a matter of principle. We own this company, and they're telling us that they'd rather use all the profits they generated (out of the money we provided) for themselves. It's not that I think every company should always pay out a dividend. It doesn't make sense if you're growing fast, or losing money. Berkshire doesn't have to because we generally agree that Buffett's a better investor than the rest of us. For the vast majority of companies not in these categories though, it seems like the shareholders would be better off if they just got the cash.
    - adw 15y ago
      No, not for themselves; for their shareholders – ie for you. They're saying that there's an illiquid opportunity they can access which you can't. You might disagree with them; if you do, sell the stock.
- ikono 15y ago
  > "Even a company that's growing ought to pay dividends in most cases." That's not true. Companies have opportunities to invest money into things that a normal investor cannot. If a company can invest the money at an above average rate it should. For US investors, it's even more clear cut as dividends would be taxed if payed out. If the company instead retains and prudently invests that money, the company in essence is able to generate a return on money that would have been payed as taxes. Over the long haul, that "float" is extremely valuable.

stock_toaster 15y ago

Correct me if I am wrong, but I believe an additional benefit is that the tax rate on dividends is substantially lower than that of capital gains.

dirtae 15y ago
You're wrong. The long term capital gains tax rate in the U.S. is 15% for most people. The tax rate for "qualified" dividends (essentially, dividends on stock that you've held for awhile) is 15%. Starting in 2013, dividends will be taxed at your ordinary income tax rate (which is the way they used to be taxed), while long term capital gains will be taxed at 20%, which means that for most people, dividends will be more highly taxed than long term capital gains.
- stock_toaster 15y ago
  Ah. Thanks for the correction. The information I had must have been dated, looking here[1] it does appear that my information was old (probably from the 2003-2007 timeframe). I could have also been misremembering, and in fact the original data was probably comparing income tax to dividends tax. Good thing I am not an accountant! It does seem that recent changes have again adjusted the tax rate. In fact, based on more information[2], it seems long term capital gains tax is in fact lower (while short term is the same as dividend tax). [1]: https://secure.wikimedia.org/wikipedia/en/wiki/Dividend_tax#United_States https://secure.wikimedia.org/wikipedia/en/wiki/Dividend_tax#... [2]: https://secure.wikimedia.org/wikipedia/en/wiki/Capital_gains_tax_in_the_United_States https://secure.wikimedia.org/wikipedia/en/wiki/Capital_gains... (updated for formatting)

wonnage 15y ago

Even a company that's growing ought to pay dividends in most cases. After all, if your shareholders have faith in continued good business they have the option of reinvesting their dividends. Companies that don't pay out are essentially telling you that your money's better off in the company, which strikes me as a rather arrogant way to treat your owners.

akronim 15y ago
Dividends are basically saying "we're returning earnings because you can probably invest them better than we can". It's up to the investor balance their portfolio and decide how much money they have invested in the company, dividends are supposed to be that mechanism.
- wonnage 15y ago
  Sure, and as a shareholder I can say that I always know better. In reality I probably don't, but it's a matter of principle. We own this company, and they're telling us that they'd rather use all the profits they generated (out of the money we provided) for themselves. It's not that I think every company should always pay out a dividend. It doesn't make sense if you're growing fast, or losing money. Berkshire doesn't have to because we generally agree that Buffett's a better investor than the rest of us. For the vast majority of companies not in these categories though, it seems like the shareholders would be better off if they just got the cash.
  - adw 15y ago
    No, not for themselves; for their shareholders – ie for you. They're saying that there's an illiquid opportunity they can access which you can't. You might disagree with them; if you do, sell the stock.
ikono 15y ago
> "Even a company that's growing ought to pay dividends in most cases." That's not true. Companies have opportunities to invest money into things that a normal investor cannot. If a company can invest the money at an above average rate it should. For US investors, it's even more clear cut as dividends would be taxed if payed out. If the company instead retains and prudently invests that money, the company in essence is able to generate a return on money that would have been payed as taxes. Over the long haul, that "float" is extremely valuable.