INTRODUCTIONDividends are essentially payments that a corporation makes to itsshareholders. It is a part of the annual profit that is handed out individualswho hold company stocks. Companies are not required to pay out adividend to their shareholders it totally depends on the company’sdiscretion. The dividend amount is set by the companys board ofdirectors and is typically paid on a quarterly basis from the companyscurrent or retained earnings.Dividends are usually paid in two forms namely Cash and Stock Dividend.
CASH DIVIDENDSCash Dividends are usually counted in Rupees per share . We can bestexplain this concept with a small example. Let’s assume you own 100shares of ABC company. At the end of the year they review their financialperformance and the profit they have accumulated in the course of 1year. The board of directors of the company decides to issue 1 Rupeedividend per share. This would entitle you to 1 Rupee X 100 Shares whichis 100 rupees of dividend.
STOCK DIVIDENDSStock Dividends on the other hand do not provide the shareholders with acash return. It is basically a growth of the shares you own of thatparticular company. Any stock dilution of 25% or greater is considered asplit, so a 5-for-4 exchange is a stock split, not a stock dividend. Stocksplits simply reduce the par value per share of stock outstanding. Incontrast, stock dividends require the shifting of retained earnings into thecompanys capital stock account, which reduces the cash available to payout classified as a dividend.
WHICH IS BETTER – CASH OR STOCK?Both dividend payout methods have their own set of loyalists. Proponentsof the Stock Dividend method consider it to be far more beneficial as itprovides them a tax-free way of reinvesting in the business by simplyholding on to the stock while they also have the opportunity to get a cashpayout by selling their shares. Stock dividends are taxable only if they aresold while cash dividends are immediately taxable.
On the other hand you have proponents of the Cash Dividend methodthat consider to be a responsibility towards the company and preventthem from squandering wealth that rightfully belongs to the shareholder.The advantage here is that shareholders who get the cash dividend havethe option of reinvesting when the stock prices are lower and henceending up making profit from their decision.
WHAT SHOULD YOU CHOOSE?The bottom line is that you should choose depending on the kind ofbenefits that you are seeking. Both dividend methods have their pros andcons and there is not “Right Answer” when it comes to choosing aparticular method. Weigh out the benefits and go for something that willbring you greater value.
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