I got notified recently from a company I have shares in of a payment. I initially thought it was a dividend but under payment type it says "Capital Repayment".

What does it mean, how is it different to a dividend? Is the company buying some shares back?

  • 1
    Capital repayment comes from paid-in-capital. It can be in cash or shares. Regular dividends come from company earnings. I don't know what corporate advantage one has over the other. – Bob Baerker Dec 20 '18 at 4:21
  • What do you mean by 'paid-in-capital'? – Aequitas Dec 20 '18 at 4:21
  • Did the number of shares you own change with this transaction? – mhoran_psprep Dec 20 '18 at 11:17

(Much as Bob B said) Dividends are usually funded out of the earnings of the company, either current-year or retained. If the company decides for whatever reason to distribute dividends in excess of earnings, they are accounted for as coming out of paid-in capital, and this is called 'return of capital' or just 'capital distribution'.

If you are in the US (which you didn't say) for an ordinary person (not a corporation or trust etc, or a tax-exempt organization, or in the securities or related business, or several other special cases), the difference is that

  • a normal dividend is taxed for the year it is received (except if it's actually a distribution of tax-exempt interest, typically from a mutual fund)

  • a return-of-capital distribution is subtracted from your basis if possible, and taxed when received only if/after using up (all) your basis. (Normally your basis is the amount you purchased the shares for, but some events adjust it, and this is one of them.) Otherwise the decreased basis results in a larger taxable gain (or smaller loss) sometime in the future when you sell or dispose of the shares -- unless you die first, in which case the basis 'steps up' and that payment is never taxed.

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