ABSTRACT
This chapter demonstrates that qualified domestic corporations can earn higher after-tax returns if they increase the dividend yields of their long-term equity investments. In practice, this is most appropriate for active, high turnover portfolios. Taxable corporations invest in equity securities to earn high long-term returns. Corporations can earn higher after-tax returns if they increase the dividend yields of their equity portfolios. If tax rates on long-term capital gains decline, dividend income will become relatively less attractive. For example, if long-term tax rates on capital gains drop by 50 percent over the entire investment period, a 30-year investor will marginally prefer lower-yielding equities. High-yielding stocks also tend to behave differently from low-yielding stocks. The literature on dividend policy suggests that higher-yielding equities may provide greater expected returns to compensate noncorporate investors for paying taxes earlier. High-yielding stocks tend to be concentrated within industry groups, including utilities, financials and consumer durables.
