[1] Either through dividends or through buybacks. The second option has some advantages relative to dividends and results in capital gains for the investors that choose to sell.
Second, a company’s market capitalization can only grow in one of two ways: increase in the P/E ratio, or increase in earnings. Of the two, the latter is more sustainable, and less susceptible to market downturns.
Dividends are just the percentage of earnings a company pays out to its shareholders for various reasons (I’ll skip the myriad of reasons for brevity).
The best measure of sustainable value creation is ROIC (Return On Invested Capital). Most people don’t use it because it’s not a readily available statistic and it’s not easy to calculate. But for the long term, I don’t know of anything better. Still, p/e is important.
No, that's not correct. If you are being paid a dividend, whether it be qualified or not, that money is double taxed. Once at the corporate earnings rate and then again to you personally at capital gains rate.
As a shareholder, whether that tax all comes out of your pocket or not, doesn't matter. Your increase in value is effectively taxed at 60-70%.
But that is not the case if the company you invest in, rather than retaining earnings to pay dividends, reinvests into growth or other capital expenditures or keeps large sums of untaxed money in overseas accounts. Thus continually pushing the stock upwards. And allowing investors to make their own choices about cashing out. Be it by selling shares of getting loans using the stock as collateral.
Why in the world do you think Apple has $250B in cash, a full quarter of their total market cap, mostly stashed away in tax free zones?
It is for the simple reason that people can invest and get that money reinvested for them all without ever having to sell or take a distribution and then get taxed before using it or reinvesting it yourself.
My statement is correct.
But you are iggiring the bigger picture that dividends money had to be taxed on the corporate side before it was given to you.
Capital gains that are propped up by huge cash stores in overseas tax free accounts are not.
But that is no longer the MO of many public companies now.
The goal appears to just eternally grow the stock price and allow share holders to cash out in the form of appreciated shares which get a preferable capital gains tax treatment.
Occasional earnings are just there to prove to the market that you could make money if you wanted to. Amazon has never paid dividends and probably never will unless their shareholders are able to convince them otherwise.
To take it even further, there are additional tax advantages to capital appreciation for the wealthy that hold Amazon stock. They can even choose not to sell appreciated stock but instead get low interest loans using their stock as collateral.
Buy stock - let it appreciate - increase your line of credit - live off the borrowed money that has a lower interest rate than the stock price growth rate - continue until death - let estate sell the stock and take a one time tax hit.