Why Dividends Baffle The Brains

Firstly, dividend payment tend to lead to double taxation of income - dividends are paid from after-tax profits and yet investors must pay income tax on dividends. Firstly, dividend payment tend to lead to double taxation of income - dividends are paid from after-tax profits and yet investors must pay income tax on dividends. So why do companies continue to pay dividends?

The short answer is that they do so because investors like them. In fact, they seem to like them so much that stocks do not generally go down by the full amount of the dividend over the course of the trading day in which a dividend is paid - even though it would seem that they should (see above). Researcher Elton and Gruber and Kalay both found that stocks generally decline by about 80% of the dividend paid. This would suggest that there is some value created by paying a dividend although taxes eat away almost all of that benefit.

Source: Stockopedia

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