[meric]

>> they are taxed first at the corporate rate and then again when they are distributed as dividends. >> Really? Well that sucks. What logically should happen is if you receive dividends and the company already paid 30% tax on it, and your personal tax rate is 45%, you should pay only the extra 15% tax. (And it does happen over here in Australia).

Otherwise what you get is that companies, in shareholder's interest, try not to give out so much dividends because they will be taxed twice. Instead they keep the cash to boost the share price so shareholders make capital gains.

You'd ask, what is really the point of buying stock in a company that will never pay dividend in its lifetime?

[yummyfajitas]

You'd ask, what is really the point of buying stock in a company that will never pay dividend in its lifetime?

They can distribute profits via share buybacks. Instead of distributing 1% of the companies value as dividends, they can buy back 1% of shares. You then have the option of selling 1% of your shares back (equivalent to taking dividends) or keeping your shares (equivalent to reinvesting dividends).

This only works if you are a big shareholder - if you are a small time player on ETrade, transaction costs will kill this idea.

[_delirium]

That's in practice what happens, but it does make for a bit of strangeness from the perspective of fundamental valuations. At least in idealized theory, a stock is worth the time-discounted value of its future dividends plus any terminal liquidation payout (if the company eventually gets sold for cash). A share buyback increases the share of a company that a given stockholder owns, by getting rid of some of the other outstanding shares. That should make the share more valuable, because it's now entitled to a larger percentage of those future earnings... but raising the percentage of future earnings you're entitled to is only valuable if there are any! So either there have to eventually be some dividends or a cash sale, or else we have to abandon that view of valuation as having any tie to future earnings.

[yummyfajitas]

Share buybacks and dividends are mathematically equivalent:

1% share buyback when you own 100 shares (price=$100) -> $100 cash in your hands + 99 shares valued at $100/share.

1% of corporate value distributed as dividends -> $100 cash in your hands + 100 sharesvalued at $99 (since 1% of corporate value was given away).

[roel_v]

"What logically should happen is if you receive dividends and the company already paid 30% tax on it, and your personal tax rate is 45%, you should pay only the extra 15% tax. (And it does happen over here in Australia)."

I was skeptical of this claim but Wikipedia confirms - that's an interesting scheme. It basically eliminates taxation as a decision factor in incorporating a company or not. That's interesting, I never heard of such a construct before, although it's quite obvious.

In most of Western Europe, there are different rates for dividend and income tax. So if you own a company, the company first pays e.g. 20% 'profit tax' on it, and then you pay 25% on the dividends; in the end, roughly coming out to the same marginal highest tax bracket for the income tax.