Dividends and Weight Watchers
The similarity between a managed dividend policy and Weight Watchers is behavioral.
With Weight Watchers, people will pay to do what they should do anyway. Why do we need Weight Watchers to lose weight? We know what is healthy and what is not. We know the key to weight maintenance is portion control. We don’t need to pay Weight Watchers to tell us that.
Similarly, we know that dividends are taxed twice, and that cash dividends are taxed at the higher ordinary income tax rates for shareholders. Why are we willing to pay a premium in higher taxes to have corporate leaders manage cash distributions to us when we can achieve the same distribution at the lower capital gains rate by selling some of the shares (i.e., homemade dividends)?
Some investors don’t have the discipline to sell the stock deliberately and regularly (i.e., portion control). Instead, they will pay the ordinary income tax premium to be a part of the “Weight Watchers Dividend Program”.
Posted on Wed, April 14, 2010
by Timothy E. Moffit