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Comment by macrael | Hacker News Reader

Can you expand on that comment? I have no idea what this is supposed to mean. Should this change how we interpret the stock price growth comparison between Microsoft, Apple, and Google?

Just thinking about it, I only see two ways in which that would change the stocks valuation. On the one hand, it must reduce the capital that Microsoft has on hand, which might reduce the price of the stock. On the other hand, I would imagine that the fact that owning Microsoft gives you real value in the form of an (quarterly?) payout might increase the stock's price. One can still buy and sell the stock just like a stock that doesn't pay a dividend, betting on the future success of the company, plus you get money on a regular basis. Is there some other way it relates? I really don't know much about this.

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You can make money by buying a stock, having the business get more valuable so the stock goes up, and selling the stock at a higher value. Or you can make money by buying a stock, having the business make money and pay it out to you in dividends.

At the end of the day, what matters here is how much money you make and how long it took you to get it, which is a function of sell price - buy price + dividends received - transaction costs and taxes paid. This chart ignores the dividends received part, and thus misrepresents the value of the stock. I don't know how big the dividend is so I don't know by how much. I doubt it would really make -50whatever% a whole lot better, but it would certainly be something better.

Traditionally dividends are generally paid out by businesses that can't reasonably expect to use their cash to grow - reinvesting all your cash to grow may not make sense if your growth is limited by geography or by completely owning an entire market. The textbook example is a utility company.

Correct me if I am wrong, but I believe an additional benefit is that the tax rate on dividends is substantially lower than that of capital gains.

You're wrong. The long term capital gains tax rate in the U.S. is 15% for most people. The tax rate for "qualified" dividends (essentially, dividends on stock that you've held for awhile) is 15%. Starting in 2013, dividends will be taxed at your ordinary income tax rate (which is the way they used to be taxed), while long term capital gains will be taxed at 20%, which means that for most people, dividends will be more highly taxed than long term capital gains.

Ah. Thanks for the correction. The information I had must have been dated, looking here[1] it does appear that my information was old (probably from the 2003-2007 timeframe). I could have also been misremembering, and in fact the original data was probably comparing income tax to dividends tax. Good thing I am not an accountant!

It does seem that recent changes have again adjusted the tax rate. In fact, based on more information[2], it seems long term capital gains tax is in fact lower (while short term is the same as dividend tax).

[1]: https://secure.wikimedia.org/wikipedia/en/wiki/Dividend_tax#...

[2]: https://secure.wikimedia.org/wikipedia/en/wiki/Capital_gains...

(updated for formatting)

Even a company that's growing ought to pay dividends in most cases. After all, if your shareholders have faith in continued good business they have the option of reinvesting their dividends. Companies that don't pay out are essentially telling you that your money's better off in the company, which strikes me as a rather arrogant way to treat your owners.

Dividends are basically saying "we're returning earnings because you can probably invest them better than we can". It's up to the investor balance their portfolio and decide how much money they have invested in the company, dividends are supposed to be that mechanism.

Sure, and as a shareholder I can say that I always know better. In reality I probably don't, but it's a matter of principle. We own this company, and they're telling us that they'd rather use all the profits they generated (out of the money we provided) for themselves.

It's not that I think every company should always pay out a dividend. It doesn't make sense if you're growing fast, or losing money. Berkshire doesn't have to because we generally agree that Buffett's a better investor than the rest of us. For the vast majority of companies not in these categories though, it seems like the shareholders would be better off if they just got the cash.

No, not for themselves; for their shareholders – ie for you. They're saying that there's an illiquid opportunity they can access which you can't.

You might disagree with them; if you do, sell the stock.

> "Even a company that's growing ought to pay dividends in most cases."

That's not true. Companies have opportunities to invest money into things that a normal investor cannot. If a company can invest the money at an above average rate it should.

For US investors, it's even more clear cut as dividends would be taxed if payed out. If the company instead retains and prudently invests that money, the company in essence is able to generate a return on money that would have been payed as taxes. Over the long haul, that "float" is extremely valuable.

It shouldn't change how you interpret the stock price growth, but it should change how you interpret the total return of the company.

The graph that was shown is misleading because it only represents the share price growth over the last ten years, which was down (or flat). For much of that time Microsoft was paying quarterly dividends, which means shareholders were yielding some return from their Microsoft stock even if the share price wasn't appreciating.

One way to look at this is to track the market value of a company less its cash horde. It is a safe bet to assume that none of these companies is earning much beyond money market rates, except when it is adding (or subtracting!) value by investing in its own projects. Of course in this world of financial opacity, you can't easily estimate cash more often than quarterly. The cash-less value chart would be pretty interesting.

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