Theoretically, when a company pays out a dividend to shareholders, it reduces the value of each share of stock by the amount of the dividend. All other things being equal, a company with a share value of $100 would see its share price drop to $95 the day after a $5 dividend.
So, what is the benefit to shareholders? Let’s assume an individual shareholder is going to get a $600 dividend from Apple. Receipt of the dividend constitutes a taxable event, and 15% or $90 must go to the IRS. If the shareholder really needed $600, he could have sold about one share of Apple stock. In that case instead of paying tax on the whole dividend, the shareholder would only pay a 15% tax on his gain. If the stock had cost $300, then he would have only paid 15% of the $300 gain.
While dividend paying stocks like utilities have lately been attractive to investors, nothing prevents a shareholder from selling stock to generate income. Many years ago a client told me that she needed income but never considered selling a few shares each year of a very large stock holding that had appreciated in value.
Perhaps taxes were one of the reasons that led the legendary Steve Jobs to resist the temptation to pay dividends during his long career at Apple. I’m sure it wasn’t the biggest reason since growing the business and keeping it on a firm foundation seemed to have been his top priorities. Warren Buffett has also resisted the temptation to declare dividends at Berkshire Hathaway.
It seems to me that Steve Jobs did more in his tenure at Apple to create wealth not only for himself, for his thousands of employees, and for millions of shareholders than all the community organizers and protestors who complain of the disparities of wealth in this country. Isn’t it ironic that the “Occupy” protestors all use iPhones, iPads, and iPods? ###