SmartMoney Blogs

The Tax Blog
The latest news, insights and tips about taxes

Taxable Dividends vs. Untaxable Buybacks: What’s Better?

Now that companies are recording profits again, the question becomes: What should they do with this newfound free cash?

Yes, they could reinvest in the company, but shareholders often push for stock buybacks, which raise the value of the outstanding shares, or higher dividend payments. Companies have increased their offerings of both as the economy’s started to recover: Among members of the S&P 500, repurchases jumped 128% over the past year, and dividend payments rose 9%.

From a tax standpoint, repurchases might appear to be the better news because they’re not taxable to investors. But dividends might actually be the better bet. For one thing, they’re more reliable. Share buybacks fell 61% between the third quarter of 2008 and the third quarter of 2009, while dividends underlying the S&P 500 index fell 23% in the same period.

And even though dividends are taxed, the recent tax law has made them more appealing. For the next two years, taxes on dividends will be capped at 15%. Without an extension, the dividend tax would have reverted to rates as high as 39.6% beginning in 2011.

Another bonus: Now that the tax break on dividends has been extended, shareholders are more likely to get them, as companies with hoards of cash might feel more comfortable boosting payments. (Pfizer, General Electric and Weyerhaeuser are among companies that have announced large dividend increases since the tax deal was unveiled.)

And companies don’t always buy back stock in a smart way. Companies that bought shares frequently before the recession but stopped buying during it were essentially buying high and panicking low–an investment no-no.

It raises the question of what investors find more rewarding — unpredictable but untaxed stock buybacks, or steady but taxed dividend payouts? Readers, what do do you prefer?


We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (5 of 22)

View all Comments »
    • bjvbqajoedgw

    • gyanfxufkdpp

    • lrnjukvomnec

    • Extremely enjoy the writing you’ve shown the internet. I have added your blog to my favorites. Looking forward to your upcoming blog. Go here if you want to guest write my page.

About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.