Buybacks vs. Dividends

Buybacks and dividends can be ways to distribute excess cash and compensate shareholders. Given a choice, most investors will choose a dividend over higher-value stock; many rely on the regular payouts that dividends provide.

For that very reason, companies can be wary of establishing a dividend program. Once shareholders get used to the payouts, it is difficult to discontinue or reduce them—even when that's probably the best thing to do. That said, the majority of profitable companies do pay dividends.

Buybacks do benefit all shareholders to the extent that, when stock is repurchased, shareholders get market value, plus a premium from the company. And if the stock price then rises, those that sell their shares in the open market will see a tangible benefit. Other shareholders who do not sell their shares now may see the price drop and not realize the benefit when they ultimately sell their shares at some point in the future.