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Investment Law: Assignment On Dividends and Capital Gains
Investment Law: Assignment On Dividends and Capital Gains
Assignment
On
Dividends and Capital Gains
Submitted to:
Submitted by:
Prof. Jalis Subhan
Nayeem Ahmad Dar
(Amity University)
Contents
I.
II.
III.
IV.
V.
Introduction
Dividend
A dividend declared by a mutual fund which has experienced
long-term capital gains. Shareholders report capital gain dividends as a longterm capital gain even if the mutual funds were held for less than a year.
Consequently, less tax rates apply on this kind of dividend than on an ordinary
one.
A company that wants to return a portion of its earnings to
shareholders pays a dividend. A dividend pay-out supports the price of the
stock by offering a stream of income, in most cases higher than the interest
earned from a savings account or money-market account. The company
declares the dividend ahead of time and sets the "record date" -- the date on
which you must own the stock to earn the dividend. On the payment date, the
dividend money arrives in your brokerage account in the form of cash. You
may reinvest dividends by using them to buy more shares of the stock.
Capital Gains
When you sell a stock, you realize a capital gain if you've received more
money than you paid to buy the stock. Unless they are held in certain
retirement or tax-sheltered accounts, capital gains are taxable. The IRS allows
you to calculate any brokerage commissions or fees in the gain calculation,
subtracting them from the proceeds of the sale and adding them to the original
cost. If you hold an investment for more than a year, you realize a long-term
capital gain (or loss) when you sell. Hold it less than a year, and your loss or
gain is short-term.
Your investing style determines whether you aim for dividends or capital gains
from your shares. Dividend-paying stocks offer a guarantee of a minimum
yearly income, which in a low-interest-rate environment allows them to
compare well to savings accounts, money-market accounts or bonds. If aiming
for capital gains, an investor would disregard the dividend payments (if any),
forgo the security of regular income and ride out the swings in share price.
More aggressive investors favour long-term capital gains over dividends, and
those with a time horizon of at least a year benefit from lower tax rates on
long-term vs. short-term gains.
Tax Calculations
A mutual fund dividend is income from dividends and interest earned by a
mutual funds holdings. Dividends that a fund earns must be paid to
shareholders at least once per year.
You must declare dividends as well as capital gains to the IRS on your
annual return. The company paying the dividend sends you a 1099-DIV each
year to notify you of the amount. You declare dividends as part of your annual
income on Line 9a or 9b of Form 1040. The capital gains transactions are listed
on Schedule D of Form 1040; you enter the dates that you bought and sold the
shares as well as the share prices. There are separate sections for long-term and
short-term gains. The IRS taxes long-term gains and dividends at the same
rate; short-term gains incur a higher rate of tax.
Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth
Tax Relief Reconciliation Act of 2003, better known as the Bush tax cuts -- all
dividends were taxed as ordinary income. The Bush cuts introduced the
concept of "qualified" dividends that would share the lower taxation of longterm capital gains. But the Bush legislation is due to expire on Jan. 1, 2013,
which means that the favored taxation on dividends could expire with them,
unless Congress decides to give the tax bills new life.
Conclusion
The CSS theory provides more guidance on dividend policy to company
managements than the Walter model and the Gordon model. It also reverses the
traditional order of cause and effect by implying that company valuation ratios
drive dividend policy, and not vice-versa. The CSS theory does not have
'invisible' or 'hidden' parameters such as the equity risk premium, the discount
rate, the expected growth rate or expected inflation. As a consequence the
theory can be tested in an unambiguous way. Unless they are held in certain
retirement or tax-sheltered accounts, capital gains are taxable. The IRS allows
you to calculate any brokerage commissions or fees in the gain calculation,
subtracting them from the proceeds of the sale and adding them to the original
cost.
Bibliography
Vinod Kothari, "Dividend Policy"
Dividend Policy, Robert H. Smith School of Business