You can get cash by selling shares, and the tax impact of capital gains is indeed better than that of dividends in many places. The board of directors does have to declare the dividend before paying it out, but this is usually just a rubber stamp to keep it the same. So if you're invested in a company that's in decent shape (and why invest in anything else?), you can expect that the dividend will at worst stay the same, and may even increase in the future. While the dividend rate can change, lowering the dividend is a big red flag that the company is having financial troubles. What dividends provide to investors is predictable income. But if you have a capital gains tax rate of zero or hold investments in a tax-advantaged account of some kind, that doesn't much matter. This means I would end up paying more tax if I get dividends (as opposed to capital gains).Ĭorrect. But if the company can't do anything useful with the cash, forcing investors to own idle cash drags down their returns.

But the point is that dividends do increase returns for investors, so other things they might do with the cash have to compete with the benefits of dividends. Of course, if there's something even better they could do with the cash, they should do that. Over a few years, this would add up quite significantly. The $1,000,000 in profit therefore represents an 11% return for shareholders.Īn 11% return is better than a 10% return. So the company has a market cap of $9,000,000 after the dividend. Now, let's try with a dividend to get rid of that excess cash: Since the dividend reduced the share price, the company's market cap also dropped by $1,000,000. Then suppose it makes $1,000,000 in profit over the rest of that year.įirst, let's try with no dividend: The company is worth $10,000,000 and makes $1,000,000 in profit. It may or may not issue a dividend to get rid of that $1,000,000 in cash. Suppose a company has a market cap of $10,000,000 and $1,000,000 in excess cash in the bank at the beginning of a year. A dividend is beneficial to stockholders because it increases the return on their investments.

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