Both offers have advantages

Q: Which is better, dividends or buybacks?

A: Companies can choose to use their earnings in two main ways: They can reinvest in the business or they can share their profits with investors. Or, they can do a combination of the two.

When it comes to sharing profits with investors, many companies pay dividends, which are cash payments made to shareholders. The other possibility is to buy back stock, also known as share repurchases. The idea behind share repurchases is that if there are fewer shares of a stock, the remaining shares will represent more equity in the company and therefore will be worth more.

Dividends have the obvious ad- vantage of putting money in your pocket, which you can then choose to do whatever you want with. You can reinvest your dividends or you can withdraw them from your account. However, keep in mind that dividends are considered a form of income and can be subject to income tax unless they’re paid on stocks you hold in a retirement account.

On the other hand, buybacks have the advantage of not immediately adding to your taxable income since you don’t pay tax on capital gains until you sell.

Buybacks also can be the better option if the company considers its own stock to be undervalued.

The bottom line is that if you rely on your investments for income, or if the stock trades for a high valuation, a dividend is probably preferable to you.