Who Benefits most from Dividends?

We are going to look into the misunderstanding about who gets the most from dividends by using a fictitious example. Let us say that the 123 Corporation that is managed well has had a good steady growth in earnings over the past few years. The dividend rate of the company has stayed the same as well. As a result, when five years ago it took up fifty percent of earning to pay the dividend, such a great amount of earning power has developed in the past five years that paying the same dividend now only has the need of twenty five percent of the earnings of this year. Because of this there are some directors that are aiming to increase the dividend while there are others that point out that the company has the corporation had so many interesting places in which to invest their retained earnings. They also point out that only by keeping instead of increasing the rate will it be viable to make use of all the attractive opportunities available. This is the only way in which the maximum growth is able to be obtained. When this occurs, there is obviously a big discussion that comes about as far as what road to take.

As usual there is always someone sitting with the board of directors that just has to let out of the most known of half truths of the financial community about dividends saying that if the 123 Corporation does not increase its dividend, it will be supporting the big stockholders at the expense of the smaller ones. The idea behind this is that he big stockholder is supposedly placed in a higher position. After the taxes have been paid, a big stockholder is able to keep a much smaller percentage of his dividends than the smaller stockholder is able to. Because of this he obviously does not want to added dividend, while on the other hand the smaller stockholder does want it.

In point of fact, even if it is more to the interest of any individual stockholder of 123 Corporation to have the dividend increased or to have more funds pulled back into the growth depends on something that is very dissimilar from the extent of his income.  This depends on whether or not every stockholder is at the point where he is placing any part of his income on the side for more investment. There are many, many stockholders that are in the lower income group that are taking care of their matters so that every year they put something, without mattering how little, on the side for added investment. If this is occurring and if, which is very probably the case, they are paying income tax, it is an issue of uncomplicated mathematics that the board of directors would be going against their interests by putting the dividend up at a time when all those worthwhile opportunities are on hand for utilizing retained company earnings. On the other hand, the raised dividend may be interesting to a big stockholder that has a desperate need of added funds, an unforeseen event that is not completely known to the people that are in high tax brackets.

In order to see why this is all so, it is obvious that almost anybody that has sufficient surplus funds to own common stocks will most likely also have a good enough income to be in at least the lowest tax group. For that reason, after the stockholder has used up his own dividend exemption of $50, even the smallest stockholder will probably have to pay tax at least twenty percent of any extra income he receives as dividends. Besides this, he also needs to pay another brokerage commission on any stock that is purchased. Due to the fact that strange lot charges, minimum commissions etc., that these run to a much bigger percentage of the sums involved in little purchases than in the bigger ones. This will bring the genuine capital available for reinvestment very under the eighty percent of the quantity that is received. If the shareholder is in a higher tax bracket, the percentage of a dividend increase that he is able to actually utilize for reinvestment turns into a proportionately reduced amount.