Final answer:
Financial investors are not guaranteed high capital gains just by buying companies with high profits due to market pricing in expectations, various factors influencing stock prices, and the concept of double taxation making dividends less effective for income shifting.
Step-by-step explanation:
Financial investors cannot guarantee high capital gains simply by investing in companies with a record of high profits because past performance is not necessarily indicative of future results. Stock prices are influenced by a myriad of factors, including investor expectations, market conditions, and economic indicators, which can all change and affect future performance. Moreover, by the time a company is recognized for its high profits, the market has often already 'priced in' these expectations, meaning the stock price reflects the company's current value, leaving limited potential for large capital gains.
Furthermore, when a company pays out dividends, it's making payments from its profits to shareholders. Some investors prefer this as a source of income, but for others looking to grow their wealth through the appreciation of stock value, dividends are not as effective. Dividend payments can actually reduce the amount of capital a company can reinvest into its business, potentially slowing its growth and reducing the chances for higher stock price appreciation.
The concept of double taxation is also relevant. Corporations are taxed on their profits, and when these profits are distributed as dividends, the shareholders are taxed again on the individual level. This diminishes the actual return that an investor gets from dividends, making it a less attractive means to shift income from a corporation to its owners.