Comment by triceratops

4 months ago

> Those who intend to re-invest all returns in to the stock

Sell the stock then use the gains to buy the stock? I'm very confused by this.

> without having to first pay tax for the dividend

Long term capital gains and dividends are taxed at the same rate. The only tax-free way to benefit from a higher share price (that I know of) is to borrow against it.

> get their reward in the proportion of their ownership of the company going up.

Which only matters if the company pays dividends, or the shareholders eventually sell.

4 comments

triceratops

Reply
Tuna-Fish  4 months ago

The company has some money. They choose to return it to shareholders. There are two legal ways to do so: Buy back some stock, or issue a dividend.

Now assume I am a long-term investor, who invested money into a company, and wants to keep all that money in the company, instead of taking money out.

If the company pays a dividend, I can put the money they paid me back into the company, but I have to pay capital income tax on the money in between. If they buy back some stock, I have essentially fully reinvested my money to grow my share of ownership in that company, but I have not paid any tax on this, and will only have to do so at the end. As I get to grow compound interest on my money, I will come out much better in the long term.

  • rjmunro  4 months ago

    I'm not sure about this bit:

    > As I get to grow compound interest on my money, I will come out much better in the long term.

    You will pay the capital gains tax rate either way. Either when you buy 15% less additional shares, or when you sell them at the end and pay the 15% then.

    If you start with 15% less and compound it, you still end with 15% less.

    (15% is just an example)

    You might be placing a bet that at some point in the future there will be a reduction the capital gains rate, but, as far as I can see, you are not earning more due to compounding.