Posted on | May 15, 2013 | 14 Comments
The definition of dividends is basically sharing the wealth of the company with its shareholders. There are two forms of dividends stock and cash.
A cash dividend is when a company pays back its shareholders and investors in check, cash or wire transfer. The company gives its shareholders and investor’s actual cash instead of filtering the money back into is operating funds. The main disadvantage to cash dividends is that it causes the value or price of the company to drop by the exact same amount it gave to its shareholders and investors. For example, say a company would give cash dividends equal to approximately 10% of the price of its stock, investors and shareholders would see their stocks drop by the same amount. This is due to the economic transfer. However, cash dividends can be very beneficial in that they can provide a source of income to shareholders and investors in addition to capital appreciation.
Stock dividends are the actual increase in the number of shares within a company with the newer shares actually being given to its shareholders. For example, say a company were to actually issue a stock dividend of say 10% it would also increase its shares by the same amount at the rate of 1 share for every 20 that are owned. So if a company had 200,000 shares the stock dividends would be 100,000 shares. So if you owned 200 shares in a company you would receive 20 additional shares.
However as with cash dividends this would not increase the actual value of the company. If the value was $20 a share the company’s value would be worth $20 million. After stock dividends the company value would be the same. Stock dividends are by choice. Shareholders can keep their stocks and hope they aren’t paid out via cash dividends or they could sell their extra shares creating their own cash dividends. Another big advantage of stock dividends is that shareholders normally don’t have to pay taxes on their dividends. However, taxes always need to be paid on stock dividends even if they are kept and used as cash.
Many people feel that stock dividends are better than cash dividends as long as the option for cash is not available. Cash dividends are not a bad thing there just aren’t any choices available. Shareholders and investors can still use any proceeds from cash dividends and put it back into the company via a dividend reinvestment plan.
Both types of dividends are great choices and it mostly depends on the choices each shareholder makes. It also depends on what each shareholder wants from the company they have shares in. if they are just looking for an investment and a reliable sources of month income then the choice is cash dividends. If the shareholder wants to actually invest in the company then choosing stock dividends is the best option. Stock dividends are also a good option for those that prefer selling extra stocks at the right price instead of using cash to buy additional shares.