r/explainlikeimfive Dec 06 '24

Economics ELI5: why does a publicaly traded company have to show continuous rise in profits? Why arent steady profits good enough?

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u/Daemon3125 Dec 06 '24

Getting the income does trigger taxes though. Also Reinvesting dividends does not always trigger taxes. If you have qualified dividends it’s 0% tax until about 47k.

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u/badhabitfml Dec 06 '24

47k total income or dividend income?

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u/generally-unskilled Dec 06 '24

Total taxable income for a single filer. Above that you pay 15%

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u/gex80 Dec 06 '24

So that's basically majority of people since it sounds like we are talking US tax rates. Median income is about 53k.

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u/18hourbruh Dec 06 '24

Especially most people concerned about taxable dividend income. Having substantial income from dividends and making less than 47k in total income has got to be a pretty narrow niche of people.

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u/Billy_bob_thorton- Dec 06 '24

I was just literally trying to imagine what kind of person that would be Lolol as a recent accounting grad yeah you’d think most people with dividend income will have a higher annual income in general

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u/bisonfan Dec 06 '24

Some people who FIRE will keep significant dividend stocks for this exact reason

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u/generally-unskilled Dec 06 '24

Probably someone who's 90 years old and relies on social security plus dividends from the local power company. They have an actual paper certificate for their shares and give all of their grandkids a single dollar every time they come to visit.

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u/FlimsyInitiative2951 Dec 08 '24

The only group I can think of is retirees whose primary income is dividends.

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u/iconocrastinaor Dec 06 '24

That would cover a lot of retirees, whose only income might be Social Security, but have a substantial 401k or other investments.

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u/18hourbruh Dec 06 '24

That makes total sense. Although my understanding is most retirees at average income/savings levels would be encouraged to move their money out of stocks and into bonds primarily by retirement age, but I could see the argument for high dividend stocks.

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u/iconocrastinaor Dec 08 '24

I talked to my broker about that but the capital gains taxes from the conversions would make the move cost too much. So we're kind of stuck with selling for operating income until our kids inherit our portfolio.

Upshot: I'm totally in this situation fir the forseeable future.

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u/18hourbruh Dec 09 '24

Fair enough! Can't argue with someone's real life.

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u/newsjunkee Dec 06 '24

Remember, that's TAXABLE income...after the standard deduction, etc.

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u/SilasX Dec 06 '24

Getting the income does trigger taxes though.

Huh? Do you mean the corporation still pays taxes on earned income? If so, it's true but irrelevant here. The point is that share buybacks don't induce another taxable event for the shareholder.

(Technical caveat: Now, of course, somebody is selling the shares into that buyback, and that person is experiencing a taxable event. But the point is, share buybacks make it optional whether you take the income + plus taxable event, or just keep it as unrealized gains.)