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When dividends are paid, the share price is depressed in proportion to the size of the dividend, so the shareholder breaks even. If the dividend is paid in cash, the shareholder can buy shares with it, and if it's paid in shares the shareholder can sell them for cash. Or the shareholder can obtain a dividend even if the company doesn't give it out by, say, selling a few percent of his/her holding each year. It all boils down to the same thing.
I agree with your comment, but would present one small correction.  For the investor who doesn't want to withdraw cash from his investment in a company--say he really believes in the company and wants to leave all his money in for 10 years--he is forced to take a dividend.  And while you are correct that he can buy stock with the dividend, he is first taxed on the dividend payment.  The dividend tax rate is historically low for the US today, 15%, but if it's a $1000 dividend, he would only have $850 after tax to reinvest.  This investor would be theoretically better off if the money was left in the company.
by wchurchill on Fri Dec 22nd, 2006 at 05:19:59 PM EST
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If the dividend tax rate is higher than the tax on sold shares, then it is beneficial for the investor to sell the shares themself if he wants a "dividend", and conversely. Now, the question is, if a dividend is paid in shares, doesn't the investor pay tax on that? That would make a dividend paid in shares optimal for the investor. It makes no difference to the company.

I seem to recall that un Spain there would be no tax on stock sales if the shares had been held for a period of several years. That gave the long-term investor an advantage consistent with their greater social utility. I don't know what the situation is currently.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Fri Dec 22nd, 2006 at 05:35:55 PM EST
[ Parent ]
That would be another solution - to apply tax based on timed holdings. I.E - the less tax is paid the longer you own the shares. And not too difficult to implement. A kind of tax on liquidity.

After 5 years, for instance, no tax would be payable.

This was the company taxation law in Finland for start-ups, until recently.  If you started a company and owned shares (which then required a minimum 100% capital of around 8000 €) you would pay capital gains tax if you sold within 5 years - I forget how much - but after 5 years it was all tax free.

This lead to an increase in entrepreneurship that still echoes today in Finland. 5 years happened, at the time, to be the period it would normally take to build up a viable operation with a proof-of-concept that then required further capital for exploitation. The extra capital needed meant sell-out of part or all.

But this adheres to the Peter Principle which states, crudely, that there are some people who start companies. some who grow them, and yet others who run them on the upper plateau. And very rarely can one find these talents in a single management culture.

The Finnish tax described above was seed money. It said "You risk 8000, but you could win millions". And the subtext was "You are not the right people to build it anyway"

To me, this is what governments should do: firstly, there is an ongoing actuarial analysis of present trends, extrapolated to future trends. Then instruments have to be found that dick with those trends, if they are considered to be ultimately detrimental to the 'social good'.

The 'social good' is the only thing that governments should concern themselves with. That is why they 'represent' us.

All law is to do with habituation. The sum total of what all the members in a society accept as 'normal' is behavioural. It is not good for everybody, but it is good for the majority of members. 'Strange Fruit' on the trees of the US South 50 year ago have produced a behavioural change that would never have happened without media. Strange behaviours in a society have to be explained and then accepted or rejected - that is the role of the media: the 4th Estate.

 We behave very differently as individuals, but we are rather predictable in our general attitudes because we rarely have a good choice (perfect match) in our representation. Our individual lives are analogue, but our choices are discrete - rough with the smooth.

So what I am arguing for <ducks> is a reassessment of democracy. Does 'one person, one vote' still cut it when most of the voters are traumatiised into behavioural acquiesence by the MMS?

You can't be me, I'm taken

by Sven Triloqvist on Fri Dec 22nd, 2006 at 08:24:04 PM EST
[ Parent ]
interesting point.  If you have held the shares more than 12 months the gains would be long term, taxed at 15%, which is the same as the long term gain tax.  However, if you held them less than 12 months, the tax is your ordinary income tax, which is as high as 35%--talking Federal tax only.
 Dividends paid in shares are taxed just like cash, so there's no real advantage to a share dividend, and therefore you don't see many of them.
by wchurchill on Fri Dec 22nd, 2006 at 09:19:44 PM EST
[ Parent ]
we may be getting lost in the back and forth here,,,but I think you are pointing out, that if dividends are not paid by the company, the investor can decide upon his own when to take the "dividend", ie:cash out of his investment, but simply selling shares.  and in the US, this receives the lower tax rate of capital gains, on the gain.  and I think that is a correct theoretical view.

Not to complicate this, but just fyi, there is a view among some investors that if managment has to pay a "cash" dividend, they are more accountable.  both in the sense of every quarter paying cash of some amount, and second, there is some gamesmanship that can be played in the world of accounting with income (versus cash--potential chicanery)--but those games tend to go away when it comes to writing someone a check.  these comments get into a somewhat arcane world of accounting, and apologies, though I think you understand them, as they are pretty esoteric.

by wchurchill on Sat Dec 23rd, 2006 at 02:46:49 AM EST
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This explains why dividends seem to be falling out of favour. With electronic trading and online brokerage, even by retail banks, it is so easy to withdraw cash from your investment that a dividend is generally bad for the investor.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Sat Dec 23rd, 2006 at 06:13:28 AM EST
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