We talked about the wonders of dividends yesterday , so today I want to talk about their Dark Side.
Dividends are wonderful, but they carry a high price tag when compared to capital gains.
This is one of the reasons companies often look for other ways to reward shareholders. One way is to reinvest profits in the business so that it grows at a faster rate, in effect turning those dividends into capital gains. Of course, the choice is not all or nothing. Most companies that pay dividends pay out only a percentage of their profits and reinvest the rest. The board of directors has to decide how those profits can be most efficiently used.