That's exactly the reason that some companies don't pay dividends. It leads to irrevocable gain, which means it adds to your tax liability.
Whereas, if a stock rose in value, there's no immediate tax implications for the investor. A lot of investors prefer that. In fact if the stock is donated instead of cash, there's never a tax implication.
Stocks likes TLSA and TWTR have high multiples because they stand a decent chance of having a lot of growth in the future, they have a lot of volatility because that growth is uncertain. These are fundamental facts about their business that wouldn't go away if they squeezed out some sort of token dividend.
twitter, surprisingly, is actually showing a positive EPS (is that new?) although the P/E is > 100 so, again, a dividend would be pretty small.
at least apple is paying out these days.
Why don't you just sell a bit of your holdings each year, and get this irrevocable return yourself?
And if others don't want to sell and be taxed each year, they can just hold onto their shares (and continue to be subject to market risk).
The difference is that if the company pays dividends then the stock price will drop because it represents a claim on a smaller amount of assets. So you can achieve exactly the same effect yourself by periodically selling a small percentage of your holdings. It's like having a big piece of a small cake versus a small piece of a big cake: if you get the same amount of cake in the end then who cares how it's shaped.
Look, for instance, at the proposal to reduce the deductible limits for retirement contributions.
Capital gains are, however, absolutely owed on qualified dividends.
In either case (with the added assumption that we're talking about securities held in a non-tax-advantaged account), your brokerage will send you an IRS form 1099-div.
https://www.investopedia.com/ask/answers/011215/if-i-reinves...
And I would argue that, in effect, the capital gains are taxed less because the tax is not taken out each year, and instead the capital is left to compound.
https://www.irs.gov/instructions/i1099div#idm140075526633184
"Capital gain dividend" does not mean the same thing as "qualified dividend."
https://www.irs.gov/instructions/i1099div#idm140075526633184
Short term capital gain income is taxed as ordinary income. Long term capital gain income is taxed at a favorable rate called the "long-term capital gain (tax) rate."
You have the rates for qualified and ordinary dividends backwards. Qualified dividends the ones that get taxed at the same lower rate as capital gains income (i.e., they "qualify" for preferential tax treatment).
The tax code makes a bright line out of the distinction between income and capital that is, economically speaking, quite fuzzy. Depending on your need for liquidity and your means of acquiring it, it might not be really there.
Not a particular trustworthy site, but whatever:
[0] https://www.thebalance.com/how-to-use-the-zero-percent-tax-r...
That distinction exists for a reason.
Since, as you say, the corporation is legally distinct, whether I own the whole corporation or just part of it is neither here nor there. My objection is the same, which is that there are two tollgates between me and what I see as my share of the income.
Australia's corporate tax system allows for "franking credits". Shareholders receive these from companies based on their proportional ownership. The income tax paid by the corporation may be offset against the income tax owed by shareholders.
Unsurprisingly, Australian companies are much more likely to pay dividends.
I am happy to make the normative statement that any tax code that creates such an incentive probably is badly designed, though.
If you were not actually arguing along these lines and were merely correcting his terminology without rebutting his main point, I would have expected you to preface your comment to this effect, e.g., "Not disputing your point, but technically this doesn't qualify as 'double taxation' because...".
Apologies if I've misinterpreted.
Really? I thought qualified dividends were taxed at the same rate as long term capital gains. This is zero for very low-income taxpayers, but certainly not "wealthy" ones, like you describe. Or perhaps I'm missing something?
The trick is somehow the popular media has changed the word wealthy to mean high income instead of, you know, having wealth.
Also, this is equally true for LTCG, so in the context of this discussion (qualified dividends versus buybacks, which increase LTCG), it doesn't move the needle one way or the other.
I feel like people have been conditioned to get an irrational hatred when they hear the word "buyback" as if it were some evil trick pulled by those evil banksters over in wallstreet. "buybacks are killing capitalism" blah blah. Its pure FUD that comes from finance being complex and the average person not being nearly informed enough about it to parse it correctly.
Buybacks and dividends both are ways of returning capital to shareholders. Dividends do it directly, buybacks do it by raising the share price.
Example: Company makes 100$ profit and is worth 1000$ @ 1$/unit. You own 100 units of stock. Lets say it pays out everything to shareholders every year, once a year, at the end. It can pay this as a dividend, so you would get 10$ at the end of the year, for a total of 110$.
Or it can do buybacks, and buys 100$ worth of units, effectively removing them for existence, and lowering the total number of units to 900. The company still makes 100$ though, and to keep the same ratio of price to earnings, 10 (=1$*1000units/100$), the price of each unit needs to rise to 1.111$, making your shares worth 111$.
As you can see, they are pretty much identical, both giving 10% returns, except dividends are taxed much harder so buybacks win. The buyback shares are worth 1$ more, because this is a simplified example and I don't account for compounding, and you would have to continuously collect dividends and reinvest them continuously to get the same result(111$), which more closely approximates what happens in reality.
Dividends are just traditional, buybacks are just another way to do the same thing. Your "dividend" is the share price increasing over the course of the year.
Say a company is worth $1000, and has 100 shares outstanding, for a share price of $10.
They can pay a dividend of $100, reducing their value to $900 (share price of $9) and paying out $1 per share to shareholders. In the end, the shareholders still have $10 of value per share, but some was forcibly liquidated!
Alternatively, the company can do a stock buyback of 10% of their shares. They spend $100 destroying 10 shares. The company is now worth $900 and there are 90 shares outstanding - investors still have $10 worth of value, whether they sold their shares or not.
In the end, no value is created in either scenario - capital is just returned to shareholders.
This is still a simplification because: 1. Stock prices often rise on the announcement of new dividends/share repurchases for similar reasons. It's a positive signal to investors that either of these things will happen, and affects their valuation of the firm. 2. Investors like capital-efficient businesses, and either of these methods of returning capital can actually create value for investors.
Perhaps the capital gains rate should be raised to make buybacks equally attractive, tax-wise, to dividends. Perhaps it would spur investment over paydays.
I'd prefer to target whichever factor correlates best with how much the person can afford to pay. A capital gains tax is bad by this analysis, because it also hits the retirement accounts of poorer folk. An income tax increase for high incomes would only affect the rich.
The main reason I would increase the capital gains rate is the very richest, like Warren Buffet (as he himself pointed out), pay a lower rate than much less wealthy/lower income people due to the favorable capital gains rate. This sort of inversion shouldn't exist in a progressive tax system. Personally I view one of the several valid goals of a tax system to be keeping income/wealth inequality within reasonable limits and I think this would help with that.
Given that interest rates were so low from 2009-2017, many companies actually issued debt not because they needed the money but in order to do stock buybacks. Some companies such as McDonalds have definitely overdipped as their revenues declined significantly, but other companies like Apple and Microsoft were smart to do it while maintaining growth.
Apple had $0 long term debt in 2013. At the end of June 2018 they held $97B!!!
The average debt interest for AAPL and MSFT is somewhere between 2-2.5% interest, and prior to the 2017 Jobs act the interest payments were 100% tax deductible. I think that's a key part of why companies did this, they viewed the debt as basically free money after inflation and the tax deduction. Unfortunately this is less tax revenue for the US government and its citizens, so in effect its us the taxpayers that are funding the debt for the buybacks. The NY Times opinion piece fails to mention this aspect. It would be amazing to hear from a CFO on the topic.
Since the 2017 Jobs act companies are now restricted to 30% of their pretax income being deductible to interest. For fiscally responsible companies like AAPL, MSFT, they're nowhere near to 30%, so the intent of this change is largely moot.
Now for a real financial hacker -- i'd like to ask about a wild idea, what happens 2 years out from now supposing that interest rates remain high. All companies looking to raise debt will have to raise at 4%+ interest, and CECL and the fed reserve rate increases will see banks requiring much larger deposits than toda. The bond holders for MCD, MSFT, AAPL, etc, could look to sell to increase their reserves and also get better returning assets. Will megacorps be able to buy back their own debt above fair market value, but above below their principle amount, in effect having earned money on the debt they issued?
> Apple had $0 long term debt in 2013. At the end of June 2018 they held $97B!!!
They also have much more than that in cash (and cash-equivalents). If you want to make a point about companies giving to shareholders money that they don’t really have Apple or Microsoft are not the best examples.
Given that many long term investors believe in dollar-cost averaging and explicitly refuse to try to forecast if the price will rise or fall over the short run, both groups can be right at the same time and aren't directly opposed viewpoints.
Ackman’s short of Herbalife wasn't a long term short so much as a long series of short term shorts (also this is not a very common occurrence or he wouldn't be so famous for doing it). The most common means of shorting a stock is to buy put option contracts. Those contracts have an expiration date by which you must cover the put. That date is seldom more than a few weeks in the future. Therefore, because of these short term contracts, most short interest is short term and assumes that a correction is imminent.
At the same time that someone is speculating that a stock will go down soon, other people are investing long based on a thesis that over a long time frame the stock will go up. These long interests are often regularly investing smaller amounts into a stock as opposed to one large investment all at once. This practice, called dollar cost averaging, is frequently undertaken to avoid trying to short term time the market (under the belief that short term price predictions are often wrong).
Taking these two strategies together, you can simultaneously have someone short a stock they expect to go down soon and someone else long a stock they expect to go up over 5-10+ years. Both can be right at the same time. You can then derive from this point that short interest is of limited to no concern to a long investor, which was my original point.
Herbalife is an excellent example of the market providing the right incentives and those incentives working out in the way we want them to. If Ackman had exited his position after the original corrections were made by Herbalife everyone would've won: he would've made money, long investors would have a stronger company, and Herbalife would be a real business. Instead he doubled down and so he lost, but everyone else still won.
This sounds like a really high functioning market to me. If you think TSLA is bound for 0 there are ways you can make that bet today. The fact is no one thinks that, and so no one is trying to make that bet. Same with Twitter.
> Taking these two strategies together, you can simultaneously have someone short a stock they expect to go down soon and someone else long a stock they expect to go up over 5-10+ years. Both can be right at the same time. You can then derive from this point that short interest is of limited to no concern to a long investor, which was my original point.
Right, but this doesn't mean that the incentive to devalue companies that need devaluing doesn't exist.
So as I said, I'm still not sure what you're arguing. Shorts seem to be doing what we want them to do. The market does not seem broken.
Apple does both. Not sure where that puts it....
They are also doing buybacks.
The stock market seems to have lost hold of its very basic premise:
So many stocks have such little dividend (or buyback) activity that it's a rounding error. That means the investors are more likely to be interested in pure speculation, hoping to buy before the peak and sell at highs. When you're only engaging in speculation, there's no reason the stock price has to stay tethered to reality. You end up with companies like TSLA that have insane multiples or TWTR that lose money for a decade without paying a penny back to shareholders and are still somehow "worth" billions.A rational market would be a better market, and more dividends would, in my opinion, increase rationality.