3.) Tax Preference
The tax preference theory gives three reasons why investors may want low dividend payouts due to their tax effects. The first reason is that long-term capital gains have a maximum tax rate of 20%. This differs from dividends which are taxed at incremental effective rates. With this in mind, wealthy investors would prefer companies which retained earnings back into the business and not receive dividends. The second tax effect deals with the time value of money. The value of a dollar paid in taxes in the future has a lower effective cost than a dollar paid today. Finally, beneficiaries, one who receives the stock upon death, pay no taxes on the capital gains at all. Therefore, they escape the tax altogether. FPL investors may want to defer the payment of taxes or attempt to avoid taxes all together on their gains and have FPL cut their dividend.