Three Reasons to Prefer Dividends Over Buybacks

The rate of share repurchases is growing at a torrid pace. S&P 500 Index companies bought back a stunning $432 billion in shares in 2006 -- almost 59% of reported earnings and up from 45% in 2005. This is huge.

Furthermore, these repurchases increased earnings about 4%, going a long way to explain the S&P's double-digit growth rates.

So is this a good thing for The Millionaire Zone investors?

Or if big companies have so much cash to throw around, would you be better off if they paid you a dividend instead?

Let's take a closer look.

• A bird in the hand. As the adage goes, it's better than two elsewhere. Cash is cash, and when you receive a dividend, you don't rely on the so-called market mechanism to deliver value.

  Better yet, a dividend is like an ongoing commitment to continue paying cash to investors. A stated payout isn't a contractual commitment, but especially for investment-grade corporations, it isn't likely to be retracted anytime soon.

  And tax implications follow the "bird in hand" theory. Dividends are taxed at a rate not exceeding 15% even for AMT, while a capital gain -- from a share price increase tied to a buyback -- may be taxed at ordinary rates if the stock is sold within a year. And if you wait more than a year, who knows what the tax law will be? So the dividend, at least for now, locks in the lower rate.

Click here for the video version of this story from Jennifer Openshaw.