Once a company earns profit, it has choices about what to do with it.

It can reinvest, putting money back into the business to fund growth.

It can return cash directly to shareholders in two main ways.

The first is a dividend. A direct cash payment, typically quarterly. If you own shares, you receive a payment proportional to your holding. The S&P 500 Dividend Aristocrats are a well-known group: roughly 65 companies that have increased their dividend every year for at least 25 consecutive years. Johnson & Johnson, Coca-Cola, Procter & Gamble. Through recessions, financial crises, pandemics, and technological disruptions, these companies kept raising their dividends. That kind of consistency over 25 years is itself a signal of underlying business quality.

Not all large US companies pay dividends. Amazon does not. For most of Apple’s history it did not either, only beginning in 2012. For growth-stage businesses, the logic is: the company can compound its money faster by reinvesting than it could by receiving it as a dividend and reinvesting itself.

The second method is share buybacks. The company uses its cash to purchase its own shares in the open market, reducing the total number of shares outstanding. This increases earnings per share without growing total earnings, rewarding existing shareholders by making each remaining share represent a slightly larger piece of the business. In 2024, S&P 500 companies spent over $900 billion on buybacks. It is one of the largest capital return mechanisms in the world.

Now here is the part that specifically matters for Indian investors.

Dividends paid by US companies to Indian investors attract a 25% withholding tax in the US under the India-US tax treaty. That same income is then also taxable in India when you receive it. Across both layers, the net income you actually keep can be close to half the gross dividend.

A company paying a 3% dividend yield might deliver closer to 1.5% to an Indian investor holding it directly.

This is one of the main reasons most Indian investors are better off accessing US equities through Indian mutual fund structures rather than holding dividend-paying US stocks directly. When an Indian fund holds US equities, dividends are received inside the fund and reinvested. You are not taxed on them annually. The tax event happens only when you redeem your fund units, which is a single, deferred point of taxation rather than a recurring annual one.

Buybacks, for what it is worth, do not create the same tax problem. You are only taxed when you actually sell your shares, which is under your control.