Explain to me why dividends are good and buybacks are bad. Not understanding.

[Ron Scott]

Since productive business assets are inherently more valuable than financial assets I’d prefer cash flow find its way into new products and product enhancements, perhaps some strategic, complimentary acquisitions. But sometimes that cash has nowhere to go.

I’m not a fan of dividends since they force taxable income on you whether you want it or not. Buybacks also give excess cash to investors but do so in a better way IMO since they a) don’t form a perpetual—and expensive—expectation that cash will be automatically returned to investors on a regular basis, and b) they allow shareholders to hold (no tax on unrealized gains) or sell at a time of their choosing.

But the liberal press and some pundits seem to hate buybacks while giving dividends a pass. Why is this?

[seattlecyclone]

I don't have a good explanation for that either. Taxes aside the only difference between dividends and buybacks is that in the former case the company is giving a little cash to every shareholder, while in the latter case the company is giving that cash only to the shareholders who want to redeem their investments. In both cases the company removes cash from its balance sheet and the market cap goes down accordingly.

Where there can be a difference is in equity compensation. Stock buybacks return cash to shareholders without depressing the per-share value of unvested equity awards, while dividends do reduce the value of this future compensation. Those who want to stick it to the man and see the CEOs be paid less would therefore tend to prefer companies pay dividends. Unless the company is buying back a very significant fraction of their stock (more than any company tends to pay in dividends), this effect will be pretty marginal though.

[Must_ache]

I wouldn't say dividends are bad.  Ron says they force taxable income on you whether you want it or not, but given that you bought the stock and it likely has a predictable dividend, you obviously want it.  An ETF of dividend stocks is likely to be stable but not with a ton of growth.  All you have to do is compare a chart of DVY to SPY and you can see that.  "Qualified" dividends are also tax-free up to certain thresholds, up to $89K if married filing jointly.

Over the last 20 years DVY generated a return of 3.6%/year.  It is currently also yielding 4.1% so maybe your expectation should be 7.7%/yr
Over the last 20 years SPY generated a return of 7.3%/year.  It is currently also yielding 1.6% so maybe your expectation should be 8.9%/yr

As for stock buybacks, while they do reduce the amount of stock that can be purchased, they are generally a good thing for investors.  All else being equal, if the company's earnings remain the same but the company buys back 5% of its shares, now those earnings per stock share are about 5% higher which should be reflected in the stock price.  It is a company's way of saying we think the stock is cheap so we're going to buy it ourselves.

[Dr. Pepper]

I don't think either are good or bad per se, it just depends on the circumstances. I think the question your trying to get at is what is the capital allocation policy of company X? If the company has earnings left over after reinvesting in the business then you have to make a decision to return capital to shareholders or hold onto it. If your going to return it your in effect saying we don't have a better use for this capital in the business, that can be interpreted a variety of ways by investors. Assuming you have decided to return it, then you can either buyback stock or issue a dividend. All other things being equal the buyback is more tax efficient, because the money is only taxed at the corporate level. If your stock is overvalued though, it could be more efficient to just issue the dividend.

[GilesMM]

Dividends are (or should be) very regular and predictable income returned to investors.  This is highly desirable for certain investor classes and "dividend aristocrats" command a higher valuation that others.

Buybacks are less direct and regular returns to investors.  They are normally suspended when times are tough, leaving investors out in the cold.

[vand]

Because there is enough managerial hubris out there to be buying indiscriminately when the money could almost certainly be better deployed elsewhere, and it causes a conflict of interest when their pay is mainly dependent on stock options that benefit most from the share price going up.

Would you be happy if your tenant, instead of paying you the full rent due each month, took it upon themselves put half of it towards home improvements or put it towards some of your mortgage instead? Both should benefit you but you may not have wanted that.

[Ron Scott]

Some people used to tie their panties in knots over the corporate practice of borrowing money for buybacks when money was free. They could essentially convert funds from a low interest loan into share price increases having the same value as the multiple of the corporation without increasing the company’s market cap.

When taken to an extreme I understand this practice can lead to excessive debt and possibly reductions in R&D, corporate investment, etc. But management teams and boards who are going to mess up a buyback this way would be doing something else just as stupid if buybacks were discouraged. For companies who carefully manage their finances to avoid defaulting on debt and to honestly don’t have current investment opportunities, it seems like a good idea to me.

[FireLane]

I agree that dividends and buybacks are the same from a total return perspective, and buybacks are arguably superior in terms of tax efficiency.

But just to play devil's advocate, there's the "a bird in the hand is worth two in the bush" perspective to consider. Dividends are cash in your pocket today, which you can spend however you want, or reinvest if you choose.

Buybacks aren't so dependable. Buybacks should, in theory, be reflected in higher stock valuations over time. But there's no guarantee of that. If the market is depressed, a large share buyback may not affect the price very much, so it might not move the needle on your net worth.

As for media/pundit opinions, I'd say there's a perception that corporations mostly do buybacks to benefit their own executives, who get most of their compensation in stock options. The benefits of dividends tend to be shared a little more broadly.

[merula]

I would chalk it up to those journos/pundits fundamentally not understanding either mechanism. If you don't know anything about it, "buybacks" SOUNDS like you convinced a bunch of your fat-cat friends to buy your company's stock at $X and then you're going to use company money to buy the stock from them at $Y so they pocket the difference. "Dividends" was something you saw in Monopoly so it's at least not a "new trick".

You see basically the same thing with "activist investors" on the right and with "corporate personhood" across the political spectrum.

[FINate]

Since productive business assets are inherently more valuable than financial assets I’d prefer cash flow find its way into new products and product enhancements, perhaps some strategic, complimentary acquisitions. But sometimes that cash has nowhere to go.

I’m not a fan of dividends since they force taxable income on you whether you want it or not. Buybacks also give excess cash to investors but do so in a better way IMO since they a) don’t form a perpetual—and expensive—expectation that cash will be automatically returned to investors on a regular basis, and b) they allow shareholders to hold (no tax on unrealized gains) or sell at a time of their choosing.

But the liberal press and some pundits seem to hate buybacks while giving dividends a pass. Why is this?

Buybacks are indeed more tax efficient. From a liberal POV this is less desirable because it means less tax revenue from passive investments to fund government programs.

[seattlecyclone]

Dividends are (or should be) very regular and predictable income returned to investors.  This is highly desirable for certain investor classes and "dividend aristocrats" command a higher valuation that others.

Buybacks are less direct and regular returns to investors.  They are normally suspended when times are tough, leaving investors out in the cold.

I think you're right that dividends tend to be more "sticky" than buybacks. While a corporate board has every right to change their dividends by significant amounts up or down every quarter based on the business's recent performance and upcoming projections, they seem to feel more pressure to stay the course with dividend amounts than they feel to maintain their prior rate of stock buybacks. Whether this is a feature or a bug is certainly debatable. Sometimes retaining cash to shore up the business is absolutely the right thing to do! I'm sure we could point to many companies that have prioritized maintaining (or increasing) their dividend payments over investing in the long-term success of the business, and in the end the investors did worse than if the company had cut the dividend.

The investor-side assumption that dividends will be a more stable source of income than simply selling shares is also inherently suspect. We need only look back toward the Great Recession when VTI's dividend went down by more than 50% in less than two years, and took years longer than the underlying share price to recover to the pre-recession peak.

Because there is enough managerial hubris out there to be buying indiscriminately when the money could almost certainly be better deployed elsewhere, and it causes a conflict of interest when their pay is mainly dependent on stock options that benefit most from the share price going up.

Some businesses are better off re-investing earnings into growing the business; other businesses with fewer growth opportunities are better off returning earnings to shareholders. Determining which category their business fits into is one of the main tasks for an executive and board. Like anything else in life, people do this task wrong all the time! If anything I'd say many managers are biased toward retaining the earnings since they don't want to admit their company is unlikely to provide outsized returns from that cash.

With regard to executive pay, the effect of a stock buyback should never be to push the share price up. You're retiring shares at their current market rate, which should theoretically be neutral to the per-share price if we assume the market is pricing the stock appropriately. By contrast a dividend should be expected to make the share price go down, since you're reducing the overall value of the company while keeping the number of shares constant. So yes, once the leadership does make the decision that they probably can't reinvest the company's earnings and achieve higher growth than their investors can achieve by deploying that capital elsewhere, they do have an incentive to return that cash in a way that doesn't depress the value of their unvested stock options. However as mentioned above this is likely a secondary consideration, since starting/increasing a dividend is seen by the board and the investors as more of a long-term commitment than a one-time buyback might be.

But just to play devil's advocate, there's the "a bird in the hand is worth two in the bush" perspective to consider. Dividends are cash in your pocket today, which you can spend however you want, or reinvest if you choose.

This isn't necessarily a positive! A dividend is a company choosing to liquidate part of my investment whether I want them to or not. If I'm not interested in drawing down that investment at this time, I need to take affirmative action to repurchase some shares. Furthermore the odds that the company's board of directors is able to perfectly predict the amount I want to draw down this year is essentially nil.

[Must_ache]

the effect of a stock buyback should never be to push the share price up. You're retiring shares at their current market rate, which should theoretically be neutral to the per-share price if we assume the market is pricing the stock appropriately.

I don't think that's right.

Assume we have a company with an earnings multiple of 20.
The company has 1,000,000 shares of stock and 1,000,000 in earnings. 
The company is valued at 1,000,000 x 20 = 20,000,000.
Each share of stock is worth 20,000,000/1,000,000 = $20.00

Now the board if directors decides to buy 10% of the stock and retire it (this doesn't happen instantaneously but let's assume nothing else changes)
The company now has 900,000 shares of stock but the same 1,000,000 in earnings.
The company is valued at 1,000,000 x 20 = 20,000,000
Each share of stock is worth 20,000,000/900,000 = $22.22
The stock went up 10% because the value of the company did not change, but each share represents a higher % ownership in the company.

If instead the company declares a $1.00 per share dividend
The company has promised to give away $1,000,000 so they are now only worth 19,000,000.
Each share of stock is worth 19,000,000/1,000,000 = $19.00
So you still have $20 but it's $1 cash and $19 of stock.

The timing of the dividend is no secret.  On a particular day the dividend will be distributed and the stock price will fall.  As with the stock buyback, the company usually has discretion to repurchase up to a certain number of shares over a certain time period.  It's much more nebulous and less instantaneous.  There's even at least one ETF (PKW) designed to capitalize off of this:

The Index is designed to track the performance of companies that meet the requirements to be classified as BuyBack Achievers™. The Nasdaq US BuyBack Achievers
Index is comprised of US securities issued by corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months.     

If a company reduced its shares by at least 5% it was buying them because they thought the stock was underpriced, and hopefully after the 5%+ reduction they still take that view, and maybe the stock will continue to go up on that basis alone. 

Over the last 10 years the S&P generated 11.9%/yr and as of September 30 had a P/E of 19.4
Over the last 10 years PKW generated 10.1%/yr and as of September 30 had a P/E of 13.5

[seattlecyclone]

The stock went up 10% because the value of the company did not change, but each share represents a higher % ownership in the company.

The value of the company did change because they have $2 million less on their balance sheet than before they bought back 100,000 shares at $20 apiece. That prior $20 million market cap represented $2 million for that pile of cash and $18 million for the rest of the business. Now that you've wiped that cash off the balance sheet each remaining share is worth $18 million / 900,000 = $20 per share, same as before. As you point out, each share now represents a higher fraction of "the rest of the business" than it did before (and with it a higher share of the future earnings), but you neglect to mention that this came at a cost of relinquishing any claim to that distributed pile of cash.

Compare this to if the company had paid out a 10% dividend instead. Each shareholder gets their cut of the cash, but at the same time the lower market cap is distributed among the same number of shareholders as before, meaning each share is now only worth $18 instead of $20.

[Must_ache]

hmmm good point, I take back what I said then.  Forgot about the $ used to buy the stock. 

[Ron Scott]

The stock went up 10% because the value of the company did not change, but each share represents a higher % ownership in the company.

The value of the company did change because they have $2 million less on their balance sheet than before they bought back 100,000 shares at $20 apiece. That prior $20 million market cap represented $2 million for that pile of cash and $18 million for the rest of the business. Now that you've wiped that cash off the balance sheet each remaining share is worth $18 million / 900,000 = $20 per share, same as before. As you point out, each share now represents a higher fraction of "the rest of the business" than it did before (and with it a higher share of the future earnings), but you neglect to mention that this came at a cost of relinquishing any claim to that distributed pile of cash.

Compare this to if the company had paid out a 10% dividend instead. Each shareholder gets their cut of the cash, but at the same time the lower market cap is distributed among the same number of shareholders as before, meaning each share is now only worth $18 instead of $20.

But the market almost always values business assets more than cash-on-hand or debt outstanding, hence the attraction to distributing excess cash in the form of a dividend or buyback.i If that were not the case, it would be just as lucrative to shareholders for companies to just accumulate mountains of cash instead of either investing in their business or distributing the excess through dividends or buybacks.

[zolotiyeruki]

Why does the media lionize one and demonize the other?  Because media thrives on getting people riled up, and if the media can rile people up by making it look like the evil corporations are eviling their worst evil, they'll get more eyeballs.  Dividends are portrayed as "money going back to the little guy" while buybacks are portrayed as "the greedy companies are hoarding all that money," regardless of the reality.

And the reality isn't all that sexy.  A huge percentage of company shares are owned by pension funds, index funds, etc, which are effectively owned by....the little guy.  Nobody stops to ask where the money from the buyback went (i.e. to the shareholders who now have cash instead of stock).  The tax difference between dividends now vs capital gains later isn't enough to get people all hot and bothered.

Or, put another way, the supply of "stuff to get angry about" (STGAA) isn't meeting the demand, and so more STGAA (of questionable quality) gets manufactured.

[seattlecyclone]

The stock went up 10% because the value of the company did not change, but each share represents a higher % ownership in the company.

The value of the company did change because they have $2 million less on their balance sheet than before they bought back 100,000 shares at $20 apiece. That prior $20 million market cap represented $2 million for that pile of cash and $18 million for the rest of the business. Now that you've wiped that cash off the balance sheet each remaining share is worth $18 million / 900,000 = $20 per share, same as before. As you point out, each share now represents a higher fraction of "the rest of the business" than it did before (and with it a higher share of the future earnings), but you neglect to mention that this came at a cost of relinquishing any claim to that distributed pile of cash.

Compare this to if the company had paid out a 10% dividend instead. Each shareholder gets their cut of the cash, but at the same time the lower market cap is distributed among the same number of shareholders as before, meaning each share is now only worth $18 instead of $20.

But the market almost always values business assets more than cash-on-hand or debt outstanding, hence the attraction to distributing excess cash in the form of a dividend or buyback.i If that were not the case, it would be just as lucrative to shareholders for companies to just accumulate mountains of cash instead of either investing in their business or distributing the excess through dividends or buybacks.

I'd expect the market to place roughly a $1 million value on $1 million of cash on hand. But yes, that's a lower valuation than the core business assets should have, and there's no good reason to start a corporation just to hold cash, so it makes total sense to return that cash to investors when you have more of it than you foresee being useful in the actual business.

[ChpBstrd]

Buybacks tend to happen when the company is doing well enough to do buybacks, and so the company typically buys its stock at a high point. When recession occurs or the company starts doing poorly, the stock price falls and the company quits buying. So buybacks are kinda like a formula to only buy high.

Dividends, meanwhile, are paid by companies with not enough good organic growth options to invest in. They are essentially payments to own stock in shit companies. Arguably, a lot of the dividends go to executives, and arguably they also prop up stock prices to protect executive options.

Either type of company could alternatively pay down their debts, achieve a better credit rating, lower their riskiness, and increase the value of their equity in this much-more-straightforward way. However deleveraging would lower ROE and reduce the impact of earnings growth on the stock price. Plus, the growth in free cash flow would provide a target for organized labor to go after.

The best companies pay no dividend and buy back no stock because they're so busy investing in innovative R&D.

[Ovid]

I would completely agree they are the same thing if the buybacks actually reduced the number of shares.  To incentivize management to crank the stock price, most get some or all of their salary in either free, reduced or back dated pricing stock.  My understanding is most of the dividend buybacks you see is really just offsetting the giveaways to the top members at the company.

Dividends, of course go to all shareholders.  So in essence one takes company profits and gives it to all shareholders.  The other takes company profits and gives them to the executives.

[Ron Scott]

I would completely agree they are the same thing if the buybacks actually reduced the number of shares.  To incentivize management to crank the stock price, most get some or all of their salary in either free, reduced or back dated pricing stock.  My understanding is most of the dividend buybacks you see is really just offsetting the giveaways to the top members at the company.

Dividends, of course go to all shareholders.  So in essence one takes company profits and gives it to all shareholders.  The other takes company profits and gives them to the executives.

I think this is largely false. Buybacks are frequently used for both reasons. Certainly companies often retire the shares repurchased. But even paying for options and restricted shares is smart use of capital for most companies as they have to compete for talent AND stock buyers’ attention.

As a shareholder I am much more interested in the buyback than the dividend as the former creates unrealized gains with no tax implications until I sell while the latter forces income on me whether I need it or not.

[clifp]

I would completely agree they are the same thing if the buybacks actually reduced the number of shares.  To incentivize management to crank the stock price, most get some or all of their salary in either free, reduced or back dated pricing stock.  My understanding is most of the dividend buybacks you see is really just offsetting the giveaways to the top members at the company.

Dividends, of course go to all shareholders.  So in essence one takes company profits and gives it to all shareholders.  The other takes company profits and gives them to the executives.

I think this is largely false. Buybacks are frequently used for both reasons. Certainly companies often retire the shares repurchased. But even paying for options and restricted shares is smart use of capital for most companies as they have to compete for talent AND stock buyers’ attention.

As a shareholder I am much more interested in the buyback than the dividend as the former creates unrealized gains with no tax implications until I sell while the latter forces income on me whether I need it or not.

in theory,  you are correct that buybacks are more tax-efficient than dividends.  In practice, I think they are more often used to enrich executives than to reward long-term shareholders.  A pretty typical executive bonus is something like an increase in earnings from $1 to $1.10.   Now the proper way of doing this is to cut expenses while improving the product, and increasing the effectiveness of marketing/R&D.  All of that stuff is hard to do.  On the other hand, if the stock is say $20, you can use most of that $1 in earnings to buy stock, in a few years, you'll have reduced the number of shares, which will increase EPS, and increase EPS means a higher stock price.  The higher earnings mean you get your executive bonus, while a higher stock price increases the value of your stock option.  In contrast, dividends don't do that, although a history of raising dividends does tend to result in higher stock prices.

As others have said dividends are more sticky, and companies are reluctant to cut them.  On the other stock, buybacks are easy to turn off or on.  One thing you almost never see Corporate America do is borrow money to pay dividends, but you do see them borrow money to fund share buybacks.  Now that may have been a wise thing to do when interest rates were really high, but now a dangerous idea IMO.

[Ron Scott]

I would completely agree they are the same thing if the buybacks actually reduced the number of shares.  To incentivize management to crank the stock price, most get some or all of their salary in either free, reduced or back dated pricing stock.  My understanding is most of the dividend buybacks you see is really just offsetting the giveaways to the top members at the company.

Dividends, of course go to all shareholders.  So in essence one takes company profits and gives it to all shareholders.  The other takes company profits and gives them to the executives.

I think this is largely false. Buybacks are frequently used for both reasons. Certainly companies often retire the shares repurchased. But even paying for options and restricted shares is smart use of capital for most companies as they have to compete for talent AND stock buyers’ attention.

As a shareholder I am much more interested in the buyback than the dividend as the former creates unrealized gains with no tax implications until I sell while the latter forces income on me whether I need it or not.

in theory,  you are correct that buybacks are more tax-efficient than dividends.  In practice, I think they are more often used to enrich executives than to reward long-term shareholders.  A pretty typical executive bonus is something like an increase in earnings from $1 to $1.10.   Now the proper way of doing this is to cut expenses while improving the product, and increasing the effectiveness of marketing/R&D.  All of that stuff is hard to do.  On the other hand, if the stock is say $20, you can use most of that $1 in earnings to buy stock, in a few years, you'll have reduced the number of shares, which will increase EPS, and increase EPS means a higher stock price.  The higher earnings mean you get your executive bonus, while a higher stock price increases the value of your stock option.  In contrast, dividends don't do that, although a history of raising dividends does tend to result in higher stock prices.

As others have said dividends are more sticky, and companies are reluctant to cut them.  On the other stock, buybacks are easy to turn off or on.  One thing you almost never see Corporate America do is borrow money to pay dividends, but you do see them borrow money to fund share buybacks.  Now that may have been a wise thing to do when interest rates were really high, but now a dangerous idea IMO.

As a shareholder I don’t see sticky dividends as necessarily good since the company is essentially under pressure to continually give me taxable income instead of using the money to increase the share price so I can enjoy growth and the option to cash in on it at a time of my choosing.

Similarly, shareholders who are suffering from market-driven undervaluation applaud buybacks as a way to actually leverage the undervalued share price to increase it. Go team!

Borrow to buyback? Converting “free” money into value determined by the corporation’s earnings multiple is a move I will gladly make every day as an investor—knowing that when interest rates rise the game can easily be placed on hold.

As a shareholder, I take comfort in the facts that a) a significant portion of executive pay is placed at risk on a metric close to my heart: the stock price, b) the cliff vesting schedules for stock options and restricted shares the corporation’s executives are subject to encourages them to act in the best long-term interests of the corporation, and c) large, long-term institutional investors keep an eye on the allocation of assets to buybacks, dividends, acquisitions, organic investment, etc. I do not buy the argument that buybacks are typically used by management to screw the investor.

You will find that the political wingnuts who are always fretting about executives making money are the first to demand more (anti-investor) corporate taxation and over-regulation, or to complain incessantly that corporations are “abusing“ (LOL) low borrowing costs. They are not the friend of the shareholder.

[ender]

Nearly everyone using numbers for stock/company performance do not include dividend reinvested amounts.

A stock going from $100 to $110 with a $10 dividend is going to be perceived worse than one from $100 to $120.

This has been consistent for me reading financial analysts/etc (when talking about returns) and basically everyone I talk with regarding stock market returns. Effectively everyone uses non-dividend returns as their numbers.

People are just really bad at intuitively including dividend % into the overall return for an index or given stock.


Of course this assumes some element of valuation efficiency, so a company reducing outstanding shares is still valued the same overall -- and thus $1M in stock buybacks is evenly distributed to all the remaining outstanding shares.

[Gremlin]

As a shareholder I don’t see sticky dividends as necessarily good since the company is essentially under pressure to continually give me taxable income instead of using the money to increase the share price so I can enjoy growth and the option to cash in on it at a time of my choosing.

I don't doubt this is true, but the market doesn't exist solely to cater to you.  Your value set (and mine, for that matter) are irrelevant in the eyes of the market, even as the market's value propositions are not irrelevant to you.  You are free to choose to invest solely in companies that reinvest for growth or undertake buybacks at the exclusion of providing dividend streams.  In many situations, dividends are an incredibly efficient way of delivering value to shareholders.  But not always for all shareholders, and not always equally, on a post-tax basis.  And this creates a legitimate self-selection effect within a potential pool of investors.  Including you and me.

So I think you're asking the wrong question.  Rather than asking a strawman about one mechanism being 'good' and another 'bad', you should ask yourself what you're going to do differently about the different value propositions that different companies in the market offer?  If the answer is 'nothing, I'm going to passively invest in whole market', then you need to accept the value proposition as offered.  If the answer is 'I'm going to downweight dividend stocks', then you need to accept the value proposition as offered.  If it's something else, then I think you know what I'm going to suggest...

This is how I've answered the question as to what I'm going to do differently myself.  Whilst I have a 'whole market' portfolio in aggregate, I hold a dividend rich stocks in an account where it's tax advantaged to hold dividend producing assets and I hold growth stocks in a different account where it's tax advantaged to hold growth assets.  On a pre-tax basis, my investment portfolio's performance is exactly in line with the 'whole market' portfolio, on a post-tax basis this set up outperforms holding the 'whole market' portfolio in either (or both) accounts.  For me.  Given my tax situation.

[Ron Scott]

As a shareholder I don’t see sticky dividends as necessarily good since the company is essentially under pressure to continually give me taxable income instead of using the money to increase the share price so I can enjoy growth and the option to cash in on it at a time of my choosing.

I don't doubt this is true, but the market doesn't exist solely to cater to you.  Your value set (and mine, for that matter) are irrelevant in the eyes of the market, even as the market's value propositions are not irrelevant to you.  You are free to choose to invest solely in companies that reinvest for growth or undertake buybacks at the exclusion of providing dividend streams.  In many situations, dividends are an incredibly efficient way of delivering value to shareholders.  But not always for all shareholders, and not always equally, on a post-tax basis.  And this creates a legitimate self-selection effect within a potential pool of investors.  Including you and me.

So I think you're asking the wrong question.  Rather than asking a strawman about one mechanism being 'good' and another 'bad', you should ask yourself what you're going to do differently about the different value propositions that different companies in the market offer?  If the answer is 'nothing, I'm going to passively invest in whole market', then you need to accept the value proposition as offered.  If the answer is 'I'm going to downweight dividend stocks', then you need to accept the value proposition as offered.  If it's something else, then I think you know what I'm going to suggest...

This is how I've answered the question as to what I'm going to do differently myself.  Whilst I have a 'whole market' portfolio in aggregate, I hold a dividend rich stocks in an account where it's tax advantaged to hold dividend producing assets and I hold growth stocks in a different account where it's tax advantaged to hold growth assets.  On a pre-tax basis, my investment portfolio's performance is exactly in line with the 'whole market' portfolio, on a post-tax basis this set up outperforms holding the 'whole market' portfolio in either (or both) accounts.  For me.  Given my tax situation.

I’m 6040 with a low % of assets in deferred accounts, a traditional asset location strategy, and am primarily focused on overall gains and NW growth (yes, I’m retired).

The market has catered to me nicely and I don’t actively manage with dividend funds.

[Laura33]

I suspect the difference is driven by history.

It wasn't that long ago that people had to own individual stocks and pay brokers fairly ridiculous amounts to buy and sell.  I remember early on discovering that a broker's minimum fee for a stock trade was going to be $600 -- even if I only wanted to buy or sell one share! 

Why do people buy stocks -- what are you actually getting?  You are getting a percentage of the company's future earnings stream.  A dividend is a very direct way to provide that to shareholders.  And in a world where dividends were "free" and stock trades were $$$, dividends were very highly valued. 

The "dividend vs. buyback" debate strikes me as more about the value of different types of companies.  Some of the discussion above suggests that paying dividends is basically admitting that you don't have any good ideas internally to invest in instead.  But that view seems to be founded on the belief that a "good" company is one that should always be looking to grow aggressively.  Why?  Is there not value in companies that provide a particular service, without looking to always be expanding into other areas? 

I'm thinking of things like utilities; they have historically been big dividend payers, because their regulated status meant that they had fairly predictable profits and losses.  Fundamentally, people need power in their homes.  There are rebuilds and technological advances and new pollution control requirements and all that, but buy and large, the demand for power is going to increase with (1) the population size, and (2) the number of additional electronic toys people buy.  So even in a deregulated market, I wouldn't expect a utility to behave like Apple or Google. 

So say you're a utility, and you want people to buy your stock, but you know you're never going to be exciting or offer big growth like the dramatic tech stocks.  How do you sell yourself?  How do you make people want to buy your stock instead of Apple?  Well, your stock in trade is stability; you're not going to shoot the moon like Apple, but you're also not going to crash like Pets.com.  And how do you signal to the world that you are stable and consistent?  Well, one way to do that is to signal to the world that you're willing to commit to paying out a noticeable percentage of your profits every year to shareholders.  And, of course, since dividends are sticky, committing to a dividend sends a pretty strong signal about your belief in your long-term stability/profits, in a way that a flashy buyback doesn't. 

[Gremlin]

Here in Australia there's a concept of a 'franked' dividend.  When a company pays company tax to the Australian Govt they are issued what's called a franking credit, which is basically a credit for tax paid that they can distribute to shareholders when they declare a dividend.  This is done to avoid double taxation of the profits of the business as they're distributed.  If a dividend is 'fully franked' then for every $1.00 dividend you receive in cash form, you also receive a 42c tax credit, so an effective gross amount of $1.42.

The tax credit can offset your overall tax liability, not just the tax liability from your dividend income.  It can take your net taxable income to zero, or even negative.  If it's negative, then you will receive a tax refund.  A tax refund for tax you yourself never paid.  In this situation, the effective tax rate of the dividend payments is actually negative.  You can reinvest both your dividend AND your commensurate tax refund and be better off than you would ever be under a share buyback.  Furthermore, because you're reinvesting and, in the long run markets are increasing, you're slowly increasing the average acquisition price of your holdings, which also slowly reduces the effective Capital Gains Tax you'd otherwise pay if/when you liquidate some/all of your holdings.

For certain shareholders, this is far and away the most effective way of distributing excess capital/funds.

[ChpBstrd]

Here in Australia there's a concept of a 'franked' dividend.  When a company pays company tax to the Australian Govt they are issued what's called a franking credit, which is basically a credit for tax paid that they can distribute to shareholders when they declare a dividend.  This is done to avoid double taxation of the profits of the business as they're distributed.  If a dividend is 'fully franked' then for every $1.00 dividend you receive in cash form, you also receive a 42c tax credit, so an effective gross amount of $1.42.

The tax credit can offset your overall tax liability, not just the tax liability from your dividend income.  It can take your net taxable income to zero, or even negative.  If it's negative, then you will receive a tax refund.  A tax refund for tax you yourself never paid.  In this situation, the effective tax rate of the dividend payments is actually negative.  You can reinvest both your dividend AND your commensurate tax refund and be better off than you would ever be under a share buyback.  Furthermore, because you're reinvesting and, in the long run markets are increasing, you're slowly increasing the average acquisition price of your holdings, which also slowly reduces the effective Capital Gains Tax you'd otherwise pay if/when you liquidate some/all of your holdings.

For certain shareholders, this is far and away the most effective way of distributing excess capital/funds.

Interesting. My first thought was "here's another example of a simple solution that people in the U.S. apparently cannot comprehend - the other being healthcare financing".

My second thought was "oh, so this is why Australian shares always look expensive when I look into buying them. It's because I don't get the tax credit.

[Ron Scott]

The "dividend vs. buyback" debate strikes me as more about the value of different types of companies.  Some of the discussion above suggests that paying dividends is basically admitting that you don't have any good ideas internally to invest in instead.  But that view seems to be founded on the belief that a "good" company is one that should always be looking to grow aggressively.  Why?  Is there not value in companies that provide a particular service, without looking to always be expanding into other areas? 

Sure, but the discussion is focused on our role as investors, not consumers; a different perspective altogether.

Investors typically don’t care if a company is good or bad, but whether it is better or worse.

An absolutely wonderful yet overvalued company is not really that compelling an investment.

And a company that can convert cash on hand into business assets is typically more interesting to investors than one that just makes some money and gives it to investors to figure out what to do with it. (Business assets are usually more valuable than cash….stock more valuable than a MM fund…etc.)

[Gremlin]

Interesting. My first thought was "here's another example of a simple solution that people in the U.S. apparently cannot comprehend - the other being healthcare financing".

My second thought was "oh, so this is why Australian shares always look expensive when I look into buying them. It's because I don't get the tax credit.

I think both those thoughts may be true.