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Most dividends are ordinary / ordinary income. > Dividends are the most common type of distribution from a corporation. They're paid out of the earnings and pr

Most dividends are ordinary / ordinary income. > Dividends are the most common type of distribution from a corporation. They're paid out of the earnings and profits of the corporation. Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates. https://www.irs.gov/taxtopics/tc404#:~:text=They're%20paid%20out%20of,at%20lower%20capital%20gain%20rates https://www.irs.gov/taxtopics/tc404#:~:text=They're%20paid%2.... When are dividends qualified (capital gains)? > For a dividend to be qualified, there are certain criteria that must be met, according to the IRS. For stocks, the criteria is: The stock must be held for at least 61 continuous days, unhedged, out of the 121-day period, beginning 60 days before the ex-dividend date. This covers most passively managed funds (most 401k funds these days), but still eliminates nearly all actively managed funds (the majority of capital invested). That's the whole point of share buybacks - it's a way to transfer value to shareholders that definitely isn't considered income.

formerkrogemp 4y ago
> That's the whole point of share buybacks - it's a way to transfer value to shareholders that isn't considered income. If the presumption is that share buybacks increase stock prices more than simply in the short term, then, sure, that'll work out in practice. A pitfall to share buybacks is that many executive compensation packages are tied to stock price performance which can be juiced by billions in share buybacks. What we can observe is that short term stock buybacks are pushed in favor of financial resilience, maintenance, and necessary investments that ultimately leads to the company needing few-strings attached government bailouts. One of the most recent examples is the airline industry in the US. I do appreciate the discussion around qualified and unqualified dividends and their relative tax treatments. As a short term shareholder, I'd prefer stock buybacks. As a long-term shareholder, I'd prefer more investment and financial resilience.
- onlyrealcuzzo 4y ago
  > A pitfall to share buybacks is that many executive compensation packages are tied to stock price performance which can be juiced by billions in share buybacks. You're assuming that shareholders don't want this, too. There's a reason executive pay is tied to stock price performance - that's all investors care about - because all they want is capital gains.
- cercatrova 4y ago
  Friendly reminder that the US government turned a profit from the 2008 bailout. People often hear the word bailout and think it was free money when it actually was a loan.
adolph 4y ago
> That's the whole point of share buybacks - it's a way to transfer value to shareholders that definitely isn't considered income. I thought the point of buybacks was "This company doesn't have growth ideas--invest elsewhere"
- onlyrealcuzzo 4y ago
  Not unless you think every company that returns money to shareholders is out of ideas - at which point - if you're never going to get money back, why invest in the first place?
  - InitialLastName 4y ago
    > if you're never going to get money back, why invest in the first place? That's a question for tomorrow's (hopefully larger) bag-holders, not today's.
- RC_ITR 4y ago
  Believe it or not, the S&P 500 returns something like 90%+ of net income to shareholders. That’s because net income is after R&D spend etc. is accounted for. The argument for retaining net income is that you have future capital expenses that you want to save for (like factories or servers), but that’s an increasingly less pressing need for modern companies. Given the above, companies can choose to return that net income as cash, but then shareholders have to redeploy immediately (and potentially in competitors’ stocks/bonds) OR companies can choose to buy back and burn their own shares, allowing shareholders to defer any decisions and keeping all capital locked up in the company’s stock.
  - onlyrealcuzzo 4y ago
    > but that’s an increasingly less pressing need for modern companies. Maybe in the US and EU. We exported factories and manufacturing to the developing world, where CapEx is very important. Considering that China grew at 2x the rate of the US and >3x the rate of the EU - CapEx seems to still be worth considering...
- 4y ago

formerkrogemp 4y ago

> That's the whole point of share buybacks - it's a way to transfer value to shareholders that isn't considered income. If the presumption is that share buybacks increase stock prices more than simply in the short term, then, sure, that'll work out in practice. A pitfall to share buybacks is that many executive compensation packages are tied to stock price performance which can be juiced by billions in share buybacks. What we can observe is that short term stock buybacks are pushed in favor of financial resilience, maintenance, and necessary investments that ultimately leads to the company needing few-strings attached government bailouts. One of the most recent examples is the airline industry in the US. I do appreciate the discussion around qualified and unqualified dividends and their relative tax treatments. As a short term shareholder, I'd prefer stock buybacks. As a long-term shareholder, I'd prefer more investment and financial resilience.

onlyrealcuzzo 4y ago
> A pitfall to share buybacks is that many executive compensation packages are tied to stock price performance which can be juiced by billions in share buybacks. You're assuming that shareholders don't want this, too. There's a reason executive pay is tied to stock price performance - that's all investors care about - because all they want is capital gains.
cercatrova 4y ago
Friendly reminder that the US government turned a profit from the 2008 bailout. People often hear the word bailout and think it was free money when it actually was a loan.

adolph 4y ago

> That's the whole point of share buybacks - it's a way to transfer value to shareholders that definitely isn't considered income. I thought the point of buybacks was "This company doesn't have growth ideas--invest elsewhere"

onlyrealcuzzo 4y ago
Not unless you think every company that returns money to shareholders is out of ideas - at which point - if you're never going to get money back, why invest in the first place?
- InitialLastName 4y ago
  > if you're never going to get money back, why invest in the first place? That's a question for tomorrow's (hopefully larger) bag-holders, not today's.
RC_ITR 4y ago
Believe it or not, the S&P 500 returns something like 90%+ of net income to shareholders. That’s because net income is after R&D spend etc. is accounted for. The argument for retaining net income is that you have future capital expenses that you want to save for (like factories or servers), but that’s an increasingly less pressing need for modern companies. Given the above, companies can choose to return that net income as cash, but then shareholders have to redeploy immediately (and potentially in competitors’ stocks/bonds) OR companies can choose to buy back and burn their own shares, allowing shareholders to defer any decisions and keeping all capital locked up in the company’s stock.
- onlyrealcuzzo 4y ago
  > but that’s an increasingly less pressing need for modern companies. Maybe in the US and EU. We exported factories and manufacturing to the developing world, where CapEx is very important. Considering that China grew at 2x the rate of the US and >3x the rate of the EU - CapEx seems to still be worth considering...
4y ago