Why do dividends still exist?

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hungrywave
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Why do dividends still exist?

Post by hungrywave »

Capital gains are more tax efficient than dividends in the US. Presumably, that is why Berkshire Hathaway doesn’t generate dividends.

So, why do any US companies still provide shareholders with dividends? Is it some sort of tax-inefficient budgeting tool for investors?

EDIT: I guess my follow up question is: Wouldn’t a regular stock buyback be a more tax efficient version of a dividend? This gets around the problem of a company not having good investment opportunities for its cash. Why didn’t Apple Pay a dividend and instead did a buyback?
Last edited by hungrywave on Fri Aug 09, 2019 6:08 pm, edited 1 time in total.
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jebmke
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Re: Why do dividends still exist?

Post by jebmke »

People like them
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hungrywave
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Re: Why do dividends still exist?

Post by hungrywave »

:oops:
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averagedude
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Re: Why do dividends still exist?

Post by averagedude »

Perhaps it gives investor's a false sense of security.
JBTX
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Re: Why do dividends still exist?

Post by JBTX »

I recall reading, many years ago, that paying dividends tends to instill some financial discipline in management, in that it prevents you from throwing everything away in ill advised acquisitions, investments and bonuses. They have to prioritize.

How applicable that may still be I don't know.
yohac
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Re: Why do dividends still exist?

Post by yohac »

Without dividends, there wouldn't be much incentive to buy stocks of slow-growth companies like utilities.
KyleAAA
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Re: Why do dividends still exist?

Post by KyleAAA »

Because many companies can't profitably reinvest the money into their business. It is not accurate to say not paying dividends would lead to an equivalent or greater increase in capital gains. In most situations, investors would be worse off.
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hungrywave
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Re: Why do dividends still exist?

Post by hungrywave »

KyleAAA wrote: Fri Aug 09, 2019 5:50 pm Because many companies can't profitably reinvest the money into their business. It is not accurate to say not paying dividends would lead to an equivalent or greater increase in capital gains. In most situations, investors would be worse off.
Aren’t stock buybacks equivalent to dividends but with better tax efficiency? Utilities and other companies could just do that. Didn’t Apple do a large buy back rather than issue cash as a dividend? Isn’t that better for the investor?
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Riprap
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Re: Why do dividends still exist?

Post by Riprap »

hungrywave wrote: Fri Aug 09, 2019 5:32 pm Capital gains are more tax efficient than dividends in the US. Presumably, that is why Berkshire Hathaway doesn’t generate dividends.
Berkshire doesn't pay them because WB has been able to reinvest cash generated by Berkshire very successfully. He's been very clear about his views on dividends. And you're right, WB has also said that if you need a dividend, that is if you need some cash, make you own dividend by selling a share or two. Berkshire isn't your typical publicly traded corporation though.

Going forward, especially after WB is gone, I suspect you'll see a day when Berkshire does pay a dividend. WB even concedes it is becoming more difficult to find attractive investments for the huge amounts of cash Berkshire accumulates. He has to find huge deals at attractive valuations, not an easy task. Sitting on all that cash in ultra safe treasuries could actually begin to reduce returns someday.

There will come a time that I think Berkshire's performance will essentially mirror the SP500 if it isn't here already.
kosomoto
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Re: Why do dividends still exist?

Post by kosomoto »

KyleAAA wrote: Fri Aug 09, 2019 5:50 pm Because many companies can't profitably reinvest the money into their business. It is not accurate to say not paying dividends would lead to an equivalent or greater increase in capital gains. In most situations, investors would be worse off.
This 100%. The “dividends are useless” crowd completely ignores the fact that businesses don’t perfectly scale and sometimes reinvesting in the business is going to yield a low return. In which case it would be better to send the cash to the shareholders to invest elsewhere.
kosomoto
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Re: Why do dividends still exist?

Post by kosomoto »

hungrywave wrote: Fri Aug 09, 2019 5:59 pm
KyleAAA wrote: Fri Aug 09, 2019 5:50 pm Because many companies can't profitably reinvest the money into their business. It is not accurate to say not paying dividends would lead to an equivalent or greater increase in capital gains. In most situations, investors would be worse off.
Aren’t stock buybacks equivalent to dividends but with better tax efficiency? Utilities and other companies could just do that. Didn’t Apple do a large buy back rather than issue cash as a dividend? Isn’t that better for the investor?
If a company does buybacks consistently eventually the company will be private or the shares will become too expensive to buy.
illumination
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Re: Why do dividends still exist?

Post by illumination »

Not every company could deploy what they would pay in dividends into something that would instead add share value. Some investors specifically want companies that pay reliable dividends.

I do think there's something to the theory that certain companies are more efficient if they operate under the assumption they are required to pay out a dividend and don't just have a huge pool of money every year they are constantly looking to spend or "reinvest". I've seen some studies that seem to indicate that, but it's a hard thing to quantify.

Some companies I wouldn't want a dividend, like many companies in the tech sector. I would rather be spent on growth opportunities or R&D. But if say a utility didn't pay a dividend, I'm not sure I would want to invest in it at all.
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hungrywave
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Re: Why do dividends still exist?

Post by hungrywave »

kosomoto wrote: Fri Aug 09, 2019 6:01 pm
hungrywave wrote: Fri Aug 09, 2019 5:59 pm
KyleAAA wrote: Fri Aug 09, 2019 5:50 pm Because many companies can't profitably reinvest the money into their business. It is not accurate to say not paying dividends would lead to an equivalent or greater increase in capital gains. In most situations, investors would be worse off.
Aren’t stock buybacks equivalent to dividends but with better tax efficiency? Utilities and other companies could just do that. Didn’t Apple do a large buy back rather than issue cash as a dividend? Isn’t that better for the investor?
If a company does buybacks consistently eventually the company will be private or the shares will become too expensive to buy.
Good thought but I’m not sure that is true. The stock could be split limitlessly. And stock held by the company would essentially be taken off the market. All these things are fluid and just require shareholder approval.
The world is largely random so don't sweat the small stuff.
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hungrywave
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Re: Why do dividends still exist?

Post by hungrywave »

I guess my follow up question is: Wouldn’t a regular stock buyback be a more tax efficient version of a dividend? This gets around the problem of a company not having good investment opportunities for its cash. Why didn’t Apple Pay a dividend and instead did a buyback?
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kosomoto
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Re: Why do dividends still exist?

Post by kosomoto »

hungrywave wrote: Fri Aug 09, 2019 6:05 pm
kosomoto wrote: Fri Aug 09, 2019 6:01 pm
hungrywave wrote: Fri Aug 09, 2019 5:59 pm
KyleAAA wrote: Fri Aug 09, 2019 5:50 pm Because many companies can't profitably reinvest the money into their business. It is not accurate to say not paying dividends would lead to an equivalent or greater increase in capital gains. In most situations, investors would be worse off.
Aren’t stock buybacks equivalent to dividends but with better tax efficiency? Utilities and other companies could just do that. Didn’t Apple do a large buy back rather than issue cash as a dividend? Isn’t that better for the investor?
If a company does buybacks consistently eventually the company will be private or the shares will become too expensive to buy.
Good thought but I’m not sure that is true. The stock could be split limitlessly. And stock held by the company would essentially be taken off the market. All these things are fluid and just require shareholder approval.
If the stock is being diluted at the same time they are buying shares back, they are not buying shares back.
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hungrywave
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Re: Why do dividends still exist?

Post by hungrywave »

kosomoto wrote: Fri Aug 09, 2019 6:11 pm
hungrywave wrote: Fri Aug 09, 2019 6:05 pm
kosomoto wrote: Fri Aug 09, 2019 6:01 pm
hungrywave wrote: Fri Aug 09, 2019 5:59 pm
KyleAAA wrote: Fri Aug 09, 2019 5:50 pm Because many companies can't profitably reinvest the money into their business. It is not accurate to say not paying dividends would lead to an equivalent or greater increase in capital gains. In most situations, investors would be worse off.
Aren’t stock buybacks equivalent to dividends but with better tax efficiency? Utilities and other companies could just do that. Didn’t Apple do a large buy back rather than issue cash as a dividend? Isn’t that better for the investor?
If a company does buybacks consistently eventually the company will be private or the shares will become too expensive to buy.
Good thought but I’m not sure that is true. The stock could be split limitlessly. And stock held by the company would essentially be taken off the market. All these things are fluid and just require shareholder approval.
If the stock is being diluted at the same time they are buying shares back, they are not buying shares back.
Do you mean splits cause dilution? That isn’t true. All a split does is double everyone’s shares while cutting the price in half. It solves the high share price problem.
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rbaldini
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Re: Why do dividends still exist?

Post by rbaldini »

hungrywave wrote: Fri Aug 09, 2019 6:08 pm I guess my follow up question is: Wouldn’t a regular stock buyback be a more tax efficient version of a dividend? This gets around the problem of a company not having good investment opportunities for its cash. Why didn’t Apple Pay a dividend and instead did a buyback?
That is indeed another way to distribute profits back to share holders instead of reinvesting them. But it’s not as if they are exactly equivalent. Ownership of stock changes hands in a buy back. Maybe one or both parties doesn’t want this.

Also, as another person wrote, people like them. If offering a dividend causes more people to invest in your company, even irrationally, then the rational thing to do might be to offer a dividend.
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hungrywave
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Re: Why do dividends still exist?

Post by hungrywave »

rbaldini wrote: Fri Aug 09, 2019 6:13 pm
hungrywave wrote: Fri Aug 09, 2019 6:08 pm I guess my follow up question is: Wouldn’t a regular stock buyback be a more tax efficient version of a dividend? This gets around the problem of a company not having good investment opportunities for its cash. Why didn’t Apple Pay a dividend and instead did a buyback?
That is indeed another way to distribute profits back to share holders instead of reinvesting them. But it’s not as if they are exactly equivalent. Ownership of stock changes hands in a buy back. Maybe one or both parties doesn’t want this.

Also, as another person wrote, people like them. If offering a dividend causes more people to invest in your company, even irrationally, then the rational thing to do might be to offer a dividend.
I suspect irrationality at play. Ownership isn’t really a concrete concept since companies can both buyback and create as much stock as they like.

I’ll throw this out there: https://www.investopedia.com/financial- ... idend.aspx
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kosomoto
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Re: Why do dividends still exist?

Post by kosomoto »

hungrywave wrote: Fri Aug 09, 2019 6:13 pm
kosomoto wrote: Fri Aug 09, 2019 6:11 pm
hungrywave wrote: Fri Aug 09, 2019 6:05 pm
kosomoto wrote: Fri Aug 09, 2019 6:01 pm
hungrywave wrote: Fri Aug 09, 2019 5:59 pm

Aren’t stock buybacks equivalent to dividends but with better tax efficiency? Utilities and other companies could just do that. Didn’t Apple do a large buy back rather than issue cash as a dividend? Isn’t that better for the investor?
If a company does buybacks consistently eventually the company will be private or the shares will become too expensive to buy.
Good thought but I’m not sure that is true. The stock could be split limitlessly. And stock held by the company would essentially be taken off the market. All these things are fluid and just require shareholder approval.
If the stock is being diluted at the same time they are buying shares back, they are not buying shares back.
Do you mean splits cause dilution? That isn’t true. All a split does is double everyone’s shares while cutting the price in half. It solves the high share price problem.
I’m confused as to why you brought up splits then. I didn’t mean prices get literally too high - I meant the value you get for each share would be lower if buybacks continue indefinitely regardless of valuation. Buybacks would be silly if the PE is 100 and growth is no better than other companies. Better to distribute the cash as a dividend.
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Re: Why do dividends still exist?

Post by Laika »

I hear the "cap gains and dividends are ultimately the same" and the "cap gains are taxed advantageously" crowds, and these notions have truth to them. But taking advantage of them cannot be done in an entirely passive fashion.

But ultimately, like everything else, all companies eventually die too, meaning that capital gains can't be counted on now (passively) or in the long term (the gains will eventually go to zero).

Hence, dividends are the only guaranteed, as in actually delivered, returns that a company can offer its investors.
Last edited by Laika on Fri Aug 09, 2019 6:25 pm, edited 5 times in total.
rbaldini
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Re: Why do dividends still exist?

Post by rbaldini »

hungrywave wrote: Fri Aug 09, 2019 6:16 pm I suspect irrationality at play. Ownership isn’t really a concrete concept since companies can both buyback and create as much stock as they like.

I’ll throw this out there: https://www.investopedia.com/financial- ... idend.aspx
Ou sure. I think a general principle might be: if you’re trying to sell something to an irrational buyer, the best course of action might be irrational.

Consider all of the successful and wealthy Bogleheads who insist that living on dividends is the best way to go. If that’s what they want, companies will sell them stock with a dividend.
kosomoto
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Re: Why do dividends still exist?

Post by kosomoto »

Laika wrote: Fri Aug 09, 2019 6:19 pm I hear the "cap gains and dividends are ultimately the same" and the "cap gains are taxed advantageously" crowds, and these notions have some truth to them. But taking advantage of them cannot be done in an entirely passive fashion.

But ultimately, like everything else, all companies eventually die too, meaning that capital gains can't be counted on now (passively) or in the long term (the gains will eventually go to zero).

Hence, in some sense, dividends are the only real payout that a company offers its investors.
Right. In the long run, all companies die. Dividends were created as a way to share profits with investors to make it worth raising capital and tying it up. Relying 100% on share price appreciation would have terrified investors in the 1800s I’d imagine.
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Re: Why do dividends still exist?

Post by KyleAAA »

hungrywave wrote: Fri Aug 09, 2019 5:59 pm
KyleAAA wrote: Fri Aug 09, 2019 5:50 pm Because many companies can't profitably reinvest the money into their business. It is not accurate to say not paying dividends would lead to an equivalent or greater increase in capital gains. In most situations, investors would be worse off.
Aren’t stock buybacks equivalent to dividends but with better tax efficiency? Utilities and other companies could just do that. Didn’t Apple do a large buy back rather than issue cash as a dividend? Isn’t that better for the investor?
Not necessarily. If a company has a very high valuation, for example, a cash dividend to invest elsewhere might be preferable.
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hungrywave
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Re: Why do dividends still exist?

Post by hungrywave »

Laika wrote: Fri Aug 09, 2019 6:19 pm I hear the "cap gains and dividends are ultimately the same" and the "cap gains are taxed advantageously" crowds, and these notions have truth to them. But taking advantage of them cannot be done in an entirely passive fashion.

But ultimately, like everything else, all companies eventually die too, meaning that capital gains can't be counted on now (passively) or in the long term (the gains will eventually go to zero).

Hence, dividends are the only guaranteed, as in actually delivered, returns that a company can offer its investors.
I like this idea. It could force some de-risking. Unless you’ve set your dividends to reinvest... :)
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averagedude
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Re: Why do dividends still exist?

Post by averagedude »

yohac wrote: Fri Aug 09, 2019 5:49 pm Without dividends, there wouldn't be much incentive to buy stocks of slow-growth companies like utilities.
Actually if these same slow growth companies bought back shares with the money they pay dividends to shareholders, it would dilute the shares outstanding, thus increasing their earnings per share, thus there would be capital appreciation in the share price. This would actually be better for shareholders of slow growth businesses because it is more tax efficient. You are correct though, investors have the old school thought that a dividend should be paid to them. Old traditions are hard to die such as football teams punting on 4th and short when analytics say you should go for it.
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hungrywave
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Re: Why do dividends still exist?

Post by hungrywave »

kosomoto wrote: Fri Aug 09, 2019 6:17 pm
hungrywave wrote: Fri Aug 09, 2019 6:13 pm
kosomoto wrote: Fri Aug 09, 2019 6:11 pm
hungrywave wrote: Fri Aug 09, 2019 6:05 pm
kosomoto wrote: Fri Aug 09, 2019 6:01 pm

If a company does buybacks consistently eventually the company will be private or the shares will become too expensive to buy.
Good thought but I’m not sure that is true. The stock could be split limitlessly. And stock held by the company would essentially be taken off the market. All these things are fluid and just require shareholder approval.
If the stock is being diluted at the same time they are buying shares back, they are not buying shares back.
Do you mean splits cause dilution? That isn’t true. All a split does is double everyone’s shares while cutting the price in half. It solves the high share price problem.
I’m confused as to why you brought up splits then. I didn’t mean prices get literally too high - I meant the value you get for each share would be lower if buybacks continue indefinitely regardless of valuation. Buybacks would be silly if the PE is 100 and growth is no better than other companies. Better to distribute the cash as a dividend.
Buybacks keep share value constant, not decrease. Imagine a company is worth $2 and has 2 shares, each worth $1. The company has $1 in cash it wants to give back. It has the option of delivering a $0.5 dividend (decreasing the share price to $0.5). If it does that, the company decreases in value by $1 but the shareholders get $0.5. Thus, each shareholder now has $0.5 of stock and $0.5 of dividend.

Alternatively, it could buy a share for $1. If it does this, the company will newly be worth $1 because it spent its dollar on a share. The share seller has $1 capital gains. The remaining share holder has a share worth $1.

So, in both scenarios, the company transfers cash out. But the first is a tax inefficient dividend and the second is a tax efficient capital gain.
Last edited by hungrywave on Fri Aug 09, 2019 6:40 pm, edited 1 time in total.
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tesuzuki2002
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Re: Why do dividends still exist?

Post by tesuzuki2002 »

I mean... who doesn't like cash?? It's just yet another option of doing business..
rbaldini
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Re: Why do dividends still exist?

Post by rbaldini »

Maybe the real question here is: why do we tax capital gains differently than income?
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hungrywave
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Re: Why do dividends still exist?

Post by hungrywave »

rbaldini wrote: Fri Aug 09, 2019 6:43 pm Maybe the real question here is: why do we tax capital gains differently than income?
Good point!!! It’s all too complicated!!!!
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MathIsMyWayr
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Re: Why do dividends still exist?

Post by MathIsMyWayr »

The fact that dividend does not create wealth is well known though this topics has been discussed ad nauseam. The value of a share of a company is just on paper until it is realized into real sure cash through the payment of dividend now or a sale of a share hopefully at an uncertain profit in the future. Dividend is a way to show that holding a share has real value. It has some similarity to interest paying bonds vs. zero coupon bonds. Companies paying cash on a regular basis is reassuring. Anyone still remember the dotcom exuberance? Dividend for novice investors, and growth potential and explosion of share price for smart pros!!!
WhiteMaxima
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Re: Why do dividends still exist?

Post by WhiteMaxima »

In 401k, IRA, dividend makes no difference in tax.
Wakefield1
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Re: Why do dividends still exist?

Post by Wakefield1 »

Laika wrote: Fri Aug 09, 2019 6:19 pm I hear the "cap gains and dividends are ultimately the same" and the "cap gains are taxed advantageously" crowds, and these notions have truth to them. But taking advantage of them cannot be done in an entirely passive fashion.

But ultimately, like everything else, all companies eventually die too, meaning that capital gains can't be counted on now (passively) or in the long term (the gains will eventually go to zero).

Hence, dividends are the only guaranteed, as in actually delivered, returns that a company can offer its investors.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
I wonder if the anti dividend people can refute this? That has been my belief
(stocks that don't pay dividends now could have tremendous potential to pay enormous dividends in their future-I suspect that (expectation) drives some of the high valuations of certain stocks)
kosomoto
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Re: Why do dividends still exist?

Post by kosomoto »

hungrywave wrote: Fri Aug 09, 2019 6:36 pm
kosomoto wrote: Fri Aug 09, 2019 6:17 pm
hungrywave wrote: Fri Aug 09, 2019 6:13 pm
kosomoto wrote: Fri Aug 09, 2019 6:11 pm
hungrywave wrote: Fri Aug 09, 2019 6:05 pm

Good thought but I’m not sure that is true. The stock could be split limitlessly. And stock held by the company would essentially be taken off the market. All these things are fluid and just require shareholder approval.
If the stock is being diluted at the same time they are buying shares back, they are not buying shares back.
Do you mean splits cause dilution? That isn’t true. All a split does is double everyone’s shares while cutting the price in half. It solves the high share price problem.
I’m confused as to why you brought up splits then. I didn’t mean prices get literally too high - I meant the value you get for each share would be lower if buybacks continue indefinitely regardless of valuation. Buybacks would be silly if the PE is 100 and growth is no better than other companies. Better to distribute the cash as a dividend.
Buybacks keep share value constant, not decrease. Imagine a company is worth $2 and has 2 shares, each worth $1. The company has $1 in cash it wants to give back. It has the option of delivering a $0.5 dividend (decreasing the share price to $0.5). If it does that, the company decreases in value by $1 but the shareholders get $0.5. Thus, each shareholder now has $0.5 of stock and $0.5 of dividend.

Alternatively, it could buy a share for $1. If it does this, the company will newly be worth $1 because it spent its dollar on a share. The share seller has $1 capital gains. The remaining share holder has a share worth $1.

So, in both scenarios, the company transfers cash out. But the first is a tax inefficient dividend and the second is a tax efficient capital gain.
I understand how buybacks work. I didn’t say they decrease share value. I am saying valuations matter and if a company has nothing better to invest in and will return that cash to shareholders, I’d prefer to get it in cash (rather than buybacks) to diversify across the broad market.
rbaldini
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Re: Why do dividends still exist?

Post by rbaldini »

Wakefield1 wrote: Fri Aug 09, 2019 6:47 pm
Laika wrote: Fri Aug 09, 2019 6:19 pm I hear the "cap gains and dividends are ultimately the same" and the "cap gains are taxed advantageously" crowds, and these notions have truth to them. But taking advantage of them cannot be done in an entirely passive fashion.

But ultimately, like everything else, all companies eventually die too, meaning that capital gains can't be counted on now (passively) or in the long term (the gains will eventually go to zero).

Hence, dividends are the only guaranteed, as in actually delivered, returns that a company can offer its investors.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
I wonder if the anti dividend people can refute this? That has been my belief
(stocks that don't pay dividends now could have tremendous potential to pay enormous dividends in their future-I suspect that (expectation) drives some of the high valuations of certain stocks)
In what way is a dividend “guaranteed”?
Cannot a company simply elect to stop paying one?

Suppose instead of a dividend at some frequency, the common practice was for a company to do scheduled buy-backs based on company profits? How would that be different? (I’m not sure what the answer is.) Investors could of course elect to immediately reinvest the profits, invest elsewhere, or use them as income. Like a dividend.
alex_686
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Re: Why do dividends still exist?

Post by alex_686 »

hungrywave wrote: Fri Aug 09, 2019 6:16 pm I suspect irrationality at play. Ownership isn’t really a concrete concept since companies can both buyback and create as much stock as they like.
First, you are right that from a theoretical viewpoint it does matter if a company returns cash via dividends or a buy back. Second, you are right that buy backs are a more tax efficient way to return capital.

However, I don't think it is irrational to return capital via dividends. You can ratchet up or down a buyback, or even cancel it. It is done all of the time. You don't mess around with dividends. Dividends, and increasing dividends, is a clear signal by management, that is insiders, of a high confidence of a specific minimum level of free cash flow. So it is not just perceive lower risk, but it actually a signal from management of lower risk.

A company's value is its Free Cash Flow to Equity. Highly predicable cash flows means a lower discount rate. So you can actually get a higher stock price from having your cash flow as predicable dividends rather than erratic buy backs.

It is interesting to compare and contract how the average company's dividend is treated verse a REITs dividend - which is obviously much more erratic.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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hungrywave
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Re: Why do dividends still exist?

Post by hungrywave »

alex_686 wrote: Fri Aug 09, 2019 6:55 pm
hungrywave wrote: Fri Aug 09, 2019 6:16 pm I suspect irrationality at play. Ownership isn’t really a concrete concept since companies can both buyback and create as much stock as they like.
First, you are right that from a theoretical viewpoint it does matter if a company returns cash via dividends or a buy back. Second, you are right that buy backs are a more tax efficient way to return capital.

However, I don't think it is irrational to return capital via dividends. You can ratchet up or down a buyback, or even cancel it. It is done all of the time. You don't mess around with dividends. Dividends, and increasing dividends, is a clear signal by management, that is insiders, of a high confidence of a specific minimum level of free cash flow. So it is not just perceive lower risk, but it actually a signal from management of lower risk.

A company's value is its Free Cash Flow to Equity. Highly predicable cash flows means a lower discount rate. So you can actually get a higher stock price from having your cash flow as predicable dividends rather than erratic buy backs.

It is interesting to compare and contract how the average company's dividend is treated verse a REITs dividend - which is obviously much more erratic.
Interesting! So dividends are theoretically irrational but play an important behavioral role in signaling risk goals. This must be why value companies tend to have higher dividends. Thank you! :)
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rbaldini
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Re: Why do dividends still exist?

Post by rbaldini »

kosomoto wrote: Fri Aug 09, 2019 6:52 pm
I understand how buybacks work. I didn’t say they decrease share value. I am saying valuations matter and if a company has nothing better to invest in and will return that cash to shareholders, I’d prefer to get it in cash (rather than buybacks) to diversify across the broad market.
Wait, aren’t buy backs purchased through cash?
Laika
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Re: Why do dividends still exist?

Post by Laika »

rbaldini wrote: Fri Aug 09, 2019 6:52 pm In what way is a dividend “guaranteed”?
Because it actually wound up in your bank account! :D Of course, future dividends can be cut or eliminated, just as companies can go bankrupt, laying waste your entire investment if you were counting only on capital gains.

The point, again, is that ALL companies must inevitably die. You can try to time sales of capital gains (speculative values), but the sum total of the dividends paid out over the years up to a company's death are the net genuine returns that it provided.
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bluquark
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Re: Why do dividends still exist?

Post by bluquark »

There are some missing financial concepts that need to be invented/popularized for dividends to get fully replaced by buybacks. On the company's side: "technically this is a buyback, but we promise to treat this exactly like a dividend (predictable pace and amount)". On the mutual fund/ETF side: automatic sales of shares targeting a particular withdrawal percent (i.e. Vanguard Managed Payout Fund's scheme). Only if all those branding and implementation problems are solved will buybacks be in practice, not just in theory, strictly better than dividends.

There's a coordination problem here in the financial industry -- a lot of pieces need to come together and a lot of investor teaching and trustbuilding is required to replace this powerful cultural concept. And the go-go growth stocks and casino capitalism that have become associated with buybacks in the media haven't helped.
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hungrywave
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Re: Why do dividends still exist?

Post by hungrywave »

bluquark wrote: Fri Aug 09, 2019 7:19 pm There are some missing financial concepts that need to be invented/popularized for dividends to get fully replaced by buybacks. On the company's side: "technically this is a buyback, but we promise to treat this exactly like a dividend (predictable pace and amount)". On the mutual fund/ETF side: automatic sales of shares targeting a particular withdrawal percent (i.e. Vanguard Managed Payout Fund's scheme). Only if all those branding and implementation problems are solved will buybacks be in practice, not just in theory, strictly better than dividends.

There's a coordination problem here in the financial industry -- a lot of pieces need to come together and a lot of investor teaching and trustbuilding is required to replace this powerful cultural concept. And the go-go growth stocks and casino capitalism that have become associated with buybacks in the media haven't helped.
Cool solution ideas! Thank you! :)
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Re: Why do dividends still exist?

Post by kosomoto »

rbaldini wrote: Fri Aug 09, 2019 7:03 pm
kosomoto wrote: Fri Aug 09, 2019 6:52 pm
I understand how buybacks work. I didn’t say they decrease share value. I am saying valuations matter and if a company has nothing better to invest in and will return that cash to shareholders, I’d prefer to get it in cash (rather than buybacks) to diversify across the broad market.
Wait, aren’t buy backs purchased through cash?
Yes. However, the company is deciding that cash is to be reinvested 100% in the same company (and not through capital improvements). I would prefer not to do invest excess cash into a single company (or have the choice on whether or not to do so).

If somebody comes around and says "Just sell stock equal to the amount of the buyback" - how would I do that with an index fund exactly?
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patrick013
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Re: Why do dividends still exist?

Post by patrick013 »

alex_686 wrote: Fri Aug 09, 2019 6:55 pm
It is interesting to compare and contract how the average company's dividend is treated verse a REITs dividend - which is obviously much more erratic.

What happens to EPS ?

operating reserve
dividends
research and tech dvelopment
expansion of profit centers
repairs and replacement
debt service

If a company pays an above average dividend it apparently has more money for that
and needs less for other categories. Perhaps even some buybacks.
age in bonds, buy-and-hold, 10 year business cycle
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Re: Why do dividends still exist?

Post by wootwoot »

hungrywave wrote: Fri Aug 09, 2019 5:32 pm Capital gains are more tax efficient than dividends in the US. Presumably, that is why Berkshire Hathaway doesn’t generate dividends.

So, why do any US companies still provide shareholders with dividends? Is it some sort of tax-inefficient budgeting tool for investors?

EDIT: I guess my follow up question is: Wouldn’t a regular stock buyback be a more tax efficient version of a dividend? This gets around the problem of a company not having good investment opportunities for its cash. Why didn’t Apple Pay a dividend and instead did a buyback?
Tax efficiency doesn't matter when investing in a tax sheltered account.
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Re: Why do dividends still exist?

Post by Trader Joe »

hungrywave wrote: Fri Aug 09, 2019 5:32 pm Capital gains are more tax efficient than dividends in the US. Presumably, that is why Berkshire Hathaway doesn’t generate dividends.

So, why do any US companies still provide shareholders with dividends? Is it some sort of tax-inefficient budgeting tool for investors?

EDIT: I guess my follow up question is: Wouldn’t a regular stock buyback be a more tax efficient version of a dividend? This gets around the problem of a company not having good investment opportunities for its cash. Why didn’t Apple Pay a dividend and instead did a buyback?
Because stock holders (owners) love them.
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Re: Why do dividends still exist?

Post by Laika »

bluquark wrote: Fri Aug 09, 2019 7:19 pm There are some missing financial concepts that needs to be invented/popularized for dividends to get fully replaced by buybacks.
I have doubts that a full replacement is practical. You can imagine automating sales after buy-backs to simulate dividends with the advantage of capital gains tax rates (the only advantage, if it even is one for you), but how long would that last given the resulting loss of tax revenue and changing political winds?

In addition, if you are a buy-and-hold investor, buybacks are arguably only a temporary abstraction compared to the long-term vagaries of the investing environment, and definitely worthless if the company's stock subsequently goes to zero - as all must do eventually.

I'm personally irked by extensive buy-backs. They are too-often driven by CEO's, etc., trying to boost the stock price temporarily in order to score a fat performance bonus or to cash in their options at inflated prices.
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Phineas J. Whoopee
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Re: Why do dividends still exist?

Post by Phineas J. Whoopee »

Wakefield1 wrote: Fri Aug 09, 2019 6:47 pm ...
I wonder if the anti dividend people can refute this? That has been my belief
(stocks that don't pay dividends now could have tremendous potential to pay enormous dividends in their future-I suspect that (expectation) drives some of the high valuations of certain stocks)
We are not against dividends.

We are only against misunderstandings about dividends.

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Re: Why do dividends still exist?

Post by nisiprius »

According to the dividend discount theory of stock value, dividends are the root of stock value. The value of the stock is the present value of the future stream of dividends it will pay. If you assume that the stock will never pay a dividend, then the calculation becomes indeterminate, like zero divided by zero, or infinity minus infinity. On a computer it usually displays as "NaN," not a number. Without dividends, a stock becomes something like bitcoin whose value is entirely psychological, based on circular reasoning--it's valuable because people think it's valuable because people think it's valuable. The value of stock is the present value of the future price of the stock, which in turn is the present value of the future price of the stock... and so on.

The reason why a non-dividend paying stock has a value is that it is expected that someday it will pay them. It has to pay them eventually in order to be worth owning. It's just a question of "pay me now or pay me later." Otherwise it's just speculation--like bitcoin, "I am buying it because I think it will go up."

The natural expectation is that the rate of growth of a young company is limited only by access to capital, and that it can use every dollar it gets. It shouldn't pay dividends, it should plow them back into the business. The rate of growth of an old company is limited by market saturation; no amount of capital is going to make it grow rapidly, that is not what is limiting its growth. Therefore, it should take whatever money it can't use, and use it to pay dividends. Therefore, you'd expect young companies not to pay dividends, and mature companies to pay them. This is exactly what we see with Microsoft, which began paying dividends in 2006.

If a mature company is making money, but its stock is not rising in value, shareholders will insist on dividends and use their votes to force the company to pay them.

As for buybacks, there are various buyback-focussed indexes and ETFs that track them. Yet I cannot remember anybody in this forum ever showing any interest in them.
Last edited by nisiprius on Fri Aug 09, 2019 8:22 pm, edited 2 times in total.
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totallystudly
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Re: Why do dividends still exist?

Post by totallystudly »

IBM is a shining example of how buybacks don't increase share value and dividends would have been better for everyone
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Re: Why do dividends still exist?

Post by fortyofforty »

Riprap wrote: Fri Aug 09, 2019 5:59 pm
hungrywave wrote: Fri Aug 09, 2019 5:32 pm Capital gains are more tax efficient than dividends in the US. Presumably, that is why Berkshire Hathaway doesn’t generate dividends.
Berkshire doesn't pay them because WB has been able to reinvest cash generated by Berkshire very successfully. He's been very clear about his views on dividends. And you're right, WB has also said that if you need a dividend, that is if you need some cash, make you own dividend by selling a share or two. Berkshire isn't your typical publicly traded corporation though.

Going forward, especially after WB is gone, I suspect you'll see a day when Berkshire does pay a dividend. WB even concedes it is becoming more difficult to find attractive investments for the huge amounts of cash Berkshire accumulates. He has to find huge deals at attractive valuations, not an easy task. Sitting on all that cash in ultra safe treasuries could actually begin to reduce returns someday.

There will come a time that I think Berkshire's performance will essentially mirror the SP500 if it isn't here already.
Keep in mind that much of Berkshire's cash comes from dividends paid to it by the companies it owns. Buffett and company absolutely love investing in companies that pay dividends, no matter what they claim. If you look at their top holdings, most of them are dividend paying companies. Perhaps they are able to recognize the value of dividends to Berkshire's bottom line.
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Re: Why do dividends still exist?

Post by nisiprius »

fortyofforty wrote: Fri Aug 09, 2019 8:17 pm...Buffett and company absolutely love investing in companies that pay dividends, no matter what they claim...
A real question, not rhetorical. Do Buffett and company also love investing in companies that perform buybacks? If not, what do they think the difference is and why do they think it matters?
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