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A special corporate tax account which gives shareholders designated capital dividends, tax-free.
This account is not recorded in the corporation's taxable accounting entries or financial statements.
Famed value investor Benjamin Graham wrote about the tendency of directors to come up with irrational dividend payout philosophies that had little bearing on the most intelligent economic course of action, such as paying out 25% of earnings; an arbitrary figure. One particularly interesting cultural difference between the United States and the United Kingdom is the general philosophy taken towards dividend payout policy. K., many businesses tend to distribute dividends in a way Graham would approve, treating payouts on a year-by-year basis and looking at the current earnings and economic forecast the same way a private business might.
This creates volatility in the dividend rates of many companies - you may get more or less next year even if the business, over time, does well and increases its dividend on a net basis - whereas this would be completely anathema in the United States.
It hoarded and retained earnings, becoming one of the most successful investments in history the same way Wal-Mart did.
If you had invested 0,000 in the IPO on March 13th, 1986, and locked it in a vault until late May 2016, you'd be sitting on something like ,827,182 in stock and ,635,807 in cash dividends before taxes, assuming no dividend reinvestment at all (and you know how big a deal dividend reinvestment is so you can only imagine how much more wealth you'd have if you'd been shoveling those dividends back into buying more shares).
If, when, and how much cash a company decides to return to owners in the form of dividends rather than share repurchases, reinvestment, debt reduction, or acquisitions has an enormous influence not only on the total return but on the type of investor who will be attracted to ownership.In fact, in this country we celebrate companies that have raised their dividend every year without fail for 25 years or more, calling them "Dividend Aristocrats".Companies that raised their aggregate dividends at a faster rate but didn't do so in such a way aren't included.American investors expect and demand companies to smooth dividend increases in a way that dividend cuts are relatively rare so those who rely upon the income can count on it.This means companies don't push dividend payouts as high as they can during boom years, perhaps building reserves and gently increasing dividends per share at a slower rate to keep up their sterling record of rising payouts.
The directors who sit on a company's board of directors are responsible for determining a company's dividend payout policy; one of the most important decisions they will make.