More and more of my non-REIT stock positions are paying returns of capital instead of qualified dividends. I realize this reduces my stock's basis. I welcome comments on the implications of this for corporate America and one's portfolio.
Elle
Returns of capital, also known as non-taxable distributions, have become more popular among companies as a way to distribute cash to shareholders. Instead of paying a dividend, which is considered taxable income, a company can distribute a return of capital, which reduces the shareholder's cost basis in the stock rather than being treated as income.
For corporate America, returns of capital can be a way for companies to distribute cash to shareholders without having to pay out dividends. This can be beneficial for companies that are looking to conserve cash or that have a fluctuating level of earnings. Returns of capital can also be a way for companies to return cash to shareholders without increasing their dividend payout, which can be important for companies that want to maintain a consistent dividend payout.
From a portfolio perspective, returns of capital can have both positive and negative implications. On the positive side, returns of capital can provide a source of cash flow to shareholders without increasing their tax bill. Additionally, returns of capital can help to reduce the cost basis of a stock, which can help to lower the capital gains tax when the stock is sold.
On the negative side, returns of capital can reduce the value of a stock by reducing its cost basis. Additionally, returns of capital are not considered taxable income, so they do not qualify for the lower tax rates on qualified dividends. Returns of capital also don't count as earned income, so they don't help to increase social security benefits.
It's important to consider the implications of returns of capital when evaluating a stock and to consult with a financial advisor or tax professional to determine the best course of action for your specific situation.
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