In the process of working on my income tax return this year, I was reminded that my post is not entirely correct.You're over-simplifying the situation with buybacks, at least in the US. (I'm not familiar with tax laws in other countries.)
In the US dividends are double-taxed. This is because a company that pays dividends pays corporate income tax on their gross taxable income before dividends, and then the stockholders pay income tax on the dividends. Stock buybacks, in theory at least, increase the value of each share by increasing the proportion of the company each share represents, and it avoids the dividend recipient's income tax.
Buybacks also serve to prop up a company's share price, which allows shareholders to increase their capital gains. (Chevron is a good recent example, just announcing a huge $75B buyback program.) Capital gains are taxed at a much lower rate than regular income. Dividends are taxed as regular income.
I'm not a big fan of CNBC, but this interview with Warren Buffett discusses his view of buybacks:
Warren Buffett explains the enduring power of stock buybacks for long-term investors
Warren Buffett's Berkshire Hathaway began buying back its own stock in the past decade and has long benefited from share repurchases of stocks it owns, most recently, Apple. The billionaire investor has long believed that when executed for the right reasons, buybacks are good.www.cnbc.com
It is correct that dividends are double-taxed.
What is not completely correct is that dividends are taxed as regular income. If you hold the shares long enough and with the correct timing to exceed 60 days (for common stock) or 90 days in for preferred stock in the 121 days prior to the ex-dividend date (the cutoff date for being eligible to receive the dividend payment), then the dividend is "qualified", and is taxed as a long-term capital gain (with a maximum base rate of 20%). If you don't hold the shares long enough with the correct timing the dividends are "ordinary", and are taxed at the rate of regular income (which may be up to 37%). If you're interested in reading the government's description of these rules, it is available in IRS Publication 550. When I read IRS documents I know why I feel better about ignoring my father's career advice to become an accountant.
Sorry for any confusion I caused with my oversight.
