Should investors opt for dividends or share repurchases?

After an investor has done stock analysis and invested in a dividend paying company, the investor will expect to get a dividend from the company. Since the company will have a specific amount of cash they want to return to their investors, there are two ways in which they can return the money; through share repurchases and dividends. But which of the two options should an investor go for? As you might expect, the answer is not that straightforward. Basically, share repurchases are very flexible for the issuing company. On the other hand, dividends are very flexible for an investor or shareholder.

When it comes to share repurchases, these are only excellent if the price of a share is undervalued. But when the price is overvalued, share repurchases may not be that great. In simple terms, if an investor would otherwise decide to reinvest their dividends into the same company at present-day stock prices, the investor should consider share repurchases. Share repurchases will be useful to the investor because the issuing company will automatically do it for them and this is one benefit of dividend investing. The only downside is that the investor will be taxed on the issued dividends but still continue to reinvest the money into the company.
On the flip side, if an investor decides not to reinvest the dividends into the same company at present-day stock prices, share repurchases will not be in line with their current outlook. It would only be better if the investor received higher dividends. Another point to note about investing in dividend stocks is that when a company opts for share repurchases when that amount of money could have been used for paying higher dividends, the management is basically limiting an investor’s control and increase their control. Generally, flexibility of dividends for a shareholder is important but this flexibility is not available in share repurchases.