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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.

It might be worth revisiting Keynes. The key word is liquidity...

Investments which are 'fixed' for the community are thus made 'liquid' for the individual.

...

Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind  by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called 'liquidity'. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of an investment institutions to concentrate their resources upon the holding of 'liquid' securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance whichh envelop the future. The actual, private object of the most skilled investment of to-day is 'to beat the gun'. as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.

...

These tendencies are a scarcely avoidable outcome of our having successfully organised 'liquid' investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmonton Street is, compared with Wall Street to the average American, inaccessible and very expensive. The jobber's 'turn', the high brokerage charges and the  heavy transfer tax payable to the Exchaquer, which attend dealings on the London Stock Exchange, sufficiently diminish the liquidity of the market (although the practice of fortnightly accounts operates the other way) to rule out a large proportion of the transactions characteristic of Wall Street.[4]   The introduction  of a substantial overnment transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.

The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only. But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets ovten facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is 'liquid' (though this cannot be true of all investors collectively) callms his nerves  and makes him much more willing to run a risk. If individual purchases of investments were rendered illiquid, this might seriously impede new investment, so long as alternative ways in which to hold his savings are availale to the individual. This is the dilemma. So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and know very little about them), except by organising markets wherein these assets can be easily realised for money.



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 06:45:15 AM EST
[ Parent ]
"to pass the bad, or depreciating, half-crown to the other fellow"
+
"make the purchase of an investment permanent" ie less liquid
=
dilemma

For which I'd like to know the answer...

Ignoring the practicalities of changing well-established markets, what instrument could society use to promote corporate enterprise and reduce individual or grouped speculation?

You can't be me, I'm taken

by Sven Triloqvist on Fri Dec 22nd, 2006 at 08:05:14 AM EST
[ Parent ]
Well, they could do what the entire Canadian market has done ie Companies can bung that part of their gross revenues which is in excess of "costs" into a legal wrapper and sell them off to investors in the form of "units".

So that investors get their hands on revenues BEFORE the management does. It makes the investment far less speculative.

Bugger trust law of course - a wrapper based upon French jurisprudence is better (Three Guesses what that could be), except the French haven't woken up to it, eh Jerome?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Dec 22nd, 2006 at 09:31:14 AM EST
[ Parent ]
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
[ Parent ]
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
[ Parent ]
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
[ Parent ]

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