“Why do people love dividends? Because they don’t understand either corporate finance or taxes,” William Baldwin writes for Forbes.
“Corporations disburse profits to their owners two ways: by paying dividends and by buying in their own shares. Except for the little matter of income taxes, which we will get to in a minute, the two kinds of payout are identical in their effects. And yet lots of otherwise intelligent investors are utterly persuaded that they are better off with dividends than with share buybacks,” Baldwin writes. “How else do we explain the $38 billion that has rushed into the three largest dividend ETFs (tickers VIG, DVY and SDY)? Why else would people buy a clunky defense stock like Lockheed Martin (yield, 5%)?
Baldwin writes, “Why else would Apple investors go atwitter over the prospect of a dividend increase? If Steve Jobs were alive he’d do a buyback instead.”
Read more in the full article here.