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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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