Cash dividend vs share bonus


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A cash dividend is a payment made by a company out of its earnings to investors in the form of cash, while Share bonus is an increase in the amount of shares of a company with the new shares being given to shareholders

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Cash dividend vs share bonus

  1. 1. Difference between Cash dividend and Share bonus
  2. 2. What is cash dividend?A cash dividend is a payment made by a company out of its earnings toinvestors in the form of cash. This transfers economic value from thecompany to the shareholders instead of the company using the money foroperations.However, this does cause the companys share price to drop by roughlythe same amount as the dividend.For example : If a company issues a cash dividend equal to 5% of the stockprice, shareholders will see a resulting drop of 5% in the price of theirshares
  3. 3. What is share bonus?Share bonus is an increase in the amount of shares of a company withthe new shares being given to shareholders.For example : if a company was to issue a 5% share bonuses, it wouldincrease the amount of shares by 5% (1 share for every 20 sharesowned). If there are 1 million shares in a company, this would translateinto an additional 50,000 shares. If you owned 100 shares in thecompany, youd receive five additional sharesShare bonus does not increase the value of the company. If thecompany was priced at 10 per share, the value of the company wouldbe 10 million. After the share bonuses, the value will remain the same,but the share price will decrease to 9.52 to adjust for the dividendpayoutThe biggest benefit of a share bonuses is that shareholders do notgenerally have to pay taxes on the value of dividend
  4. 4. Cash dividend v/s share bonusCash vs. Shares: 5% Dividend Cash Dividend Stock DividendStock Price Before Dividend 10 10Bonus shares Per Share 0.50 0Number of Shares Before Dividend 100 100Number of Shares After Dividend 100 105Stock Price After Dividend 10 - 0.50 = $9.50 10 * (100/105) = 9.5238Total Value After =(Shares After * Stock Price After) + Cash 100 * 9.50 + $50 = 1,000 105 * 9.5238 + 0 = 1,000Dividend
  5. 5. Cash dividend v/s share bonus• Neither cash nor share bonuses changes the shareholders net worth in the company• Cash-rich firms favor cash dividends, while growing firms or firms seeking to reduce their share prices may opt for share bonuses. A share bonus is not taxable until sold• Share bonus proponents argue that bonus shares gives shareholders maximum flexibility if they want to reinvest in the business tax-free, they can hold onto the stock. If they want to cash out, they can sell the shares• Cash dividend proponents argue that requiring a company to return cash imposes fiscal discipline and prevents the company from squandering shareholder wealth and it also suits the needs of many investors who require regular income• Others argue that you dont need either type of dividend to cash out because you can always sell existing shares. This is true, but it requires more work on the shareholders part to remember to sell shares on a regular basis
  6. 6. Cash dividend v/s share bonus Bottom Line: What Floats Your Boat?In the end it all comes down to your evaluation of managements capitalallocation skills (and integrity), the companys legitimate cash needs, andyour own cash needs which decides what kind of dividend suits you
  7. 7. Thank You! Read More Questions? Feedback? Click on any of these -Twitter Website Facebook
  8. 8. • Registered office: Kotak Securities Limited, 1st Floor, Bakhtawar, 229, Nariman Point, Mumbai - 400021. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230/INE 011207251, OTC INB 200808136, MCXSX INE 260808130.• Disclaimer: Investments in securities are subject to market risks, please read the SEBI prescribed Combined RDD prior to investing.• * Awarded Best Brokerage Firm in India by Asia Money in 2006, 2007, 2008 and 2009