<Li> when the dividend is paid, the individual shareholder pays income tax on the dividend payment . </Li> <P> In many countries, the tax rate on dividend income is lower than for other forms of income to compensate for tax paid at the corporate level . </P> <P> A capital gain should not be confused with a dividend . Generally, a capital gain occurs where a capital asset is sold for an amount greater than the amount of its cost at the time the investment was purchased . A dividend is a parsing out a share of the profits, and is taxed at the dividend tax rate . If there is an increase of value of stock, and a shareholder chooses to sell the stock, the shareholder will pay a tax on capital gains (often taxed at a lower rate than ordinary income). If a holder of the stock chooses to not participate in the buyback, the price of the holder's shares could rise (as well as it could fall), but the tax on these gains is delayed until the sale of the shares . </P> <P> Certain types of specialized investment companies (such as a REIT in the U.S.) allow the shareholder to partially or fully avoid double taxation of dividends . </P>

The payment of dividends is an example of a cost