![]() But you still need to follow the three key guidelines in our Successful Investor approach to sound investing: That tax hit and the loss of an opportunity for tax-deferred compounding greatly outweigh what they save on brokerage commissions.ĭon’t get us wrong-cash dividends are a definite plus. They also overlook the fact that they have to pay taxes on the full dividend, even if they reinvest it. They fail to recognize that brokerage commissions are now at historic lows. They put a high value on the fact that they can reinvest their dividends automatically, without paying brokerage commissions. The funny thing is that, just as investors tend to underestimate the value of stock buybacks, they overestimate the value of a dividend reinvestment program. ![]() ![]() That holding period may last until you retire, when your income tax rate is likely to be lower. The advantage of stock buybacks expands all the more if you hold off on selling until you need the money. It can add up to a huge advantage over a decade or two. However, the magic of compound interest applies to that tax deferral. This added opportunity for tax deferral may not seem like much of an advantage in any single year. That lets you defer taxes on capital gains. Of course, you’ll always have the option of holding on to your stock until it suits your purposes to sell.If the stock has moved sideways or down, the proceeds of your sale are tax-free. If you do that, you’ll only pay taxes on the sale if the stock has moved up since you bought (outside of an RRSP). If you need cash, you can sell part of your holding in the stock, presumably at a higher price than you’d get in the absence of stock buybacks.If the company instead devotes the cash to a stock buybacks, you have two options: When you hold a stock in your personal, taxable account and it pays a cash dividend, you have to pay tax on the dividend in the year in which you receive it. Second, when the company engages in stock buybacks, it bids up the price of the stock.On the whole, buyers are willing to pay slightly more for a stock with slightly higher earnings per share. When you reduce the divisor-because the company has fewer shares outstanding, due to stock buybacks-the calculation gives you a higher number for earnings per share as an answer. To get earnings per share, you divide total earnings by the number of shares outstanding. It’s simple arithmetic: buybacks reduce the number of shares outstanding. First, stock buybacks raise a company’s earnings per share.Stock buybacks raise the value of a given stock holding in two ways: And while many companies have suspended them during the COVID-19 crisis, they will resume buybacks as soon as possible as a way to add value for investors. Still, in many ways, stock buybacks, or share repurchases, are better than dividends. You can also contact the investor relations department of companies you wish to invest in.īonus Tip: While investors increasingly seek out cash dividends, few are as excited about stock buybacks. Another place to look for information is the inside back cover of most companies’ annual reports. Most companies that offer DRIPs provide details on their websites. ![]()
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