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To oversimplify, companies can distribute earnings as dividends or as capital gains. The US' tax regime strongly rewards the latter. Investors, particularly l
by patio11 12y ago
To oversimplify, companies can distribute earnings as dividends or as capital gains. The US' tax regime strongly rewards the latter. Investors, particularly large investors, have both a) explicitly asked for and b) implicitly expressed their preference (via market mechanisms) for their earnings to be in the form of capital gains.
- exelius 12y agoThis is true, though tax reforms have made the distinction less relevant for the average investor (since dividends have been taxed at the capital gains rate for most long-term investments since 2003). Regardless, there is still a benefit to buybacks on the order of a percent or two for large institutional investors as they move in and out of positions, so there is still pressure to distribute profits via stock buybacks as opposed to issuing dividends (see Apple's recent buyback programs as an example).