Dividend income tax rate ≠ capital gains tax rate

tax rate difference

Tax timing differences

No consideration of stock transaction costs

Consider stock trading costs

Total personal income tax

Investors not only have preferences for capital gains and dividend income, but even investors themselves have different preferences for corporate dividend policies due to their different marginal tax rates.

Investors with high marginal tax rates

Investors with low marginal tax rates

avoid risk

When the corporate dividend payout rate increases, the smaller the income risk borne by shareholders, the lower the return rate on equity capital required, the lower the cost of equity capital, and the corresponding value of corporate equity calculated based on perpetual annuities.

In order to maximize actual shareholder value, companies should implement a dividend policy with a high dividend distribution rate

agency cost

The goals of stakeholders are not completely consistent, and this conflict of interest relationship is reflected in different forms of agency costs in the company's dividend distribution decision-making process.

Shareholders VS Creditors

Shareholders VS managers

Controlling shareholders VS small and medium shareholders

Information asymmetry

Investors have different understandings of dividend signal information and make different judgments on corporate value.

high dividend signal

low dividend signal

Maintain an ideal capital structure to minimize the weighted average cost of capital

The amount of dividends fluctuates every year with investment opportunities and profit levels, which is not conducive to investors' arrangements for income and expenses, and is not conducive to establishing a good image of the company.

Capital structure is the ratio of long-term interest-bearing liabilities to owners' equity

When raising funds, use retained profits (if insufficient, issue new shares) and long-term payment to replenish funds. [If you can save, save]

The law stipulates that 10% of the provident fund must be withdrawn.

Conveying information about the company's positive development to the market can eliminate investors' inner uncertainty [beneficial to the company]

It is helpful for investors to arrange dividend income and expenses, especially for those shareholders who are highly dependent on dividends [beneficial to shareholders]

The payment of dividends is disconnected from earnings: fixed or steadily growing dividends must be paid when earnings are low, which may lead to a shortage of funds and a deterioration of financial conditions

Unable to keep capital costs low

Dividend distribution is closely integrated with the company's profitability, embodying the principle of sharing more if you make more profit, less if you make less, and no share if you have no profit.

Dividends vary greatly from year to year, which can easily cause the company to feel unstable, which is detrimental to stabilizing the stock price.

Share capital and capital reserves cannot be used to distribute dividends [disguised capital reduction]

The company’s after-tax profits must first be withdrawn from statutory reserves When the statutory provident fund reaches 50% of the registered capital, no further withdrawals can be made

The company's annual cumulative net profit must be a positive number before dividends can be paid, and previous years' losses must be fully compensated.

The company is not allowed to accumulate excessive profits. Once the company's retained earnings exceed the legally recognized level, additional taxes will be levied.

Based on profit protection for creditors, dividends cannot be paid if the company is unable to pay its debts or if payment of dividends would cause it to lose its ability to pay its debts.

Some shareholders who rely on dividends as their main source of income often require the company to pay stable dividends [high dividends for the poor]

Shareholders with higher marginal tax rates often object to companies issuing larger dividends for tax avoidance reasons [low dividends for the rich]

Paying higher dividends will lead to a reduction in retained earnings, which means that the company is more likely to issue new shares in the future, and the issuance of new shares will inevitably dilute the company's control [low dividends from holdings]

Companies with relatively stable earnings: strong dividend payment capabilities

Companies with unstable earnings: weak dividend payment ability

The company is highly liquid: pays higher dividends

The company is less liquid: pays lower dividends

Strong borrowing capacity: high dividend policy

Weak borrowing capacity: low dividend policy

Good investment opportunities: low dividend policy

Lack of good investment opportunities: high dividend policy

From the perspective of capital cost, if the company needs to expand funds, it should adopt a low dividend policy [retaining earnings is lower than the cost of issuing new shares]

Higher debt repayment needs: low dividend policy

Lower debt repayment requirements: high dividend policy

A company's debt contracts often have clauses that limit the extent of cash payments, forcing the company to adopt a low dividend policy

During the period of inflation, the purchasing power of money decreases, and the depreciation provided by the company cannot meet the need to replace fixed assets. It needs to use surplus to make up for the need to replace fixed assets. Therefore, during the period of inflation, the company's dividend policy is often tight.

1||| Changes in the internal structure of shareholders’ equity

2||| Increase in number of shares

3||| Earnings per share decrease

4||| Price per share drops

1||| Capital Structure

2||| total owner's equity

3||| par value per share

4||| The total market value of the stock

Increase in number of shares

Total owners’ equity remains unchanged

Dilute earnings per share, causing share price to fall

Will not lead to changes in capital structure

stock dividends

Conversion of capital reserves into share capital