If the price of the stock or mutual fund goes down by the amount of the distribution before the dividend or capital gain is distributed, what's the point? It seems like a net gain of zero. Actually, if you have to pay taxes on the distribution you will lose money by receiving it. Right?
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That's the whole point; dividends have a net zero impact for the shareholder (ignoring taxes for the moment). Yes, you do pay taxes on the dividend, but you would also pay commensurate taxes on the capital gains if/when you actually sell the stock to take profit.
Why dividends? Some companies feel their shareholders will have better use for the money than to reinvest into the corporation. It also works because some retirees like the steady yield of certain stocks.
Do I get some partial credit for help with your homework assignment?
part of the regulations for investment companies, they must distribute most of their capital gains and dividends or else have to be taxed on it themselves. Makes more sense to distribute the cost of the taxes to all shareholders than for them to take a hit in their performance return numbers.
It is also a good way to take cash out [if you are a large shareholder] without selling stock and potentially affecting its price by spooking the unwashed masses ("oh, look, CEO just dumped all these shares, s/he must know something").
RisingSun96815 said:If the price of the stock or mutual fund goes down by the amount of the distribution before the dividend or capital gain is distributed, what's the point? It seems like a net gain of zero. Actually, if you have to pay taxes on the distribution you will lose money by receiving it. Right?Ask your social studies teacher.
This is a core question in finance. Go get any finance textbook and look for a chapter about the dividend debate. You pay tax either way (dividend or capital gain), but with the capital gain, at least you can defer the time at which you pay that tax. They are also thought of as a way for management to credibly signal that things are going well in the company.
RisingSun96815 said:If the price of the stock or mutual fund goes down by the amount of the distribution before the dividend or capital gain is distributed, what's the point? It seems like a net gain of zero. Actually, if you have to pay taxes on the distribution you will lose money by receiving it. Right?
Generally, shareholders can more easily diversify themselves than a corporation. If a corporation has run out of good projects, shareholders would prefer to have that corporation distribute excess cash to them. This is because they would most likely want to invest in alternate areas than have the cash sit in a bank account at the corporate level. Even if they did want the cash in a bank account, it would generally be more tax-efficient to have the funds distributed, as interest income from cash in a corporation faces both corporate and personal taxes.
There are also lots of IRS rules on when and how certain types of organizations must distribute income to shareholders. For example, REITs have to distribute most of their income to shareholders each year.
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