Take the Cash or Reinvest Dividends? Pros and Cons

The companies that use them are typically growing organizations that don’t have a lot of cash to spare and want to increase the number of shares available on the market. Organizations facing financial difficulties sometimes switch from cash dividends to stock dividends to save money. Cash dividend and stock dividend are the two methods that companies adopt to pass a portion of their earnings to shareholders. If you own shares of a company, you may receive dividends as a reward for your investment. Dividends are payments made by a company to its shareholders from its profits or reserves.

Many companies with little liquidity (e.g. cash and equivalents) use stock dividends to reward shareholders or issue dividends which are a mix of stock and cash. For example, Macerich Co. (MAC) recently announced a $0.50 per share quarterly dividend payable in 20% cash and 80% common stock. However, they shrink a company’s shareholders’ equity and cash balance by the same amount.

  • You can usually see the accounting history of a company’s dividend payments in the investor relations portion of its website.
  • Investing is the process of laying out money today so that money will work for you, not only now but down the line for you and your loved ones in the future.
  • And if they do so, they’ll see an increase in their ownership of the company.
  • As an investor, it’s essential to understand the difference between stock dividends vs. cash dividends.

Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns. Although the company’s second-quarter case volume was flat, it did gain market share. This suggests overall market weakness, but Coca-Cola appears to be in a good position when it recovers. Founded in the late 1800s, Coca-Cola has been selling beverages for a very long time. While its soda brands, such as Coca-Cola, Sprite, and Fanta, remain popular around the world, the company has extended its reach to sell other types of drinks. These include water, sports drinks, juice, and plant-based beverages.

Low Price-To-Free-Cash-Flow Stocks Like These Are Worth A Look

This type of dividend can be as good as cash, with the added benefit that no taxes have to be paid when receiving the same. For example, if a company were to issue a 5% stock dividend, it would increase the number of shares by 5% (one share for every 20 owned). If there are one million shares in a company, this would translate into an additional 50,000 shares. If you owned 100 shares in the company, you’d receive five additional shares.

There are several differences between cash and stock dividends that investors should understand. You invest $20,000 when the stock price is $20, so you end up with 1,000 shares. At the end of the first year, you receive a dividend payment of 50 cents per share, which comes out to $500 (1,000 × $0.50). To keep things simple, we’ll assume the stock price increases by 10% each year and the dividend rate moves up by 5 cents each year. Stock dividend is when the profits of the company are distributed not in the form of cash but by issuing new shares to the existing shareholders. If you own 100 shares in a dividend stock and the company pays a 5% stock dividend, you end up with 105 shares.

Companies usually pay dividends on a fixed schedule, such as quarterly, semi-annually, or yearly. Occasionally some companies will pay what’s called a special dividend, in addition to, or in replacement of regular dividends. Dividends, whether in cash or in stock, are the shareholders’ cut of the company’s profit.

The key here is that the shareholders receive an actual and immediate monetary value as dividend. Preferred shareholders also receive cash dividends in the same manner as common shareholders do. The main difference is that preferred dividends are often fixed at a rate stipulated in the security’s prospectus. Cash dividends are typically credited to investors’ brokerage accounts where the stock holding resides. Although it is much less common, investors who hold shares directly, and not through an investment account, may be issued paper cheques for the dividend amount they are entitled to. Cash dividends are declared by a corporation’s Board of Directors, and are paid to shareholders on a per share basis.

While dividends are a discretionary item, they are a real cash outlay that is not tax deductible and is not reflected in earnings. Subtracting dividends and adding back noncash expenses to earnings provides an estimate of cash flow. Earnings, dividends and asset values may be important factors, but it is ultimately a company’s ability to generate cash that fuels the growth in these factors.

How a Stock Dividend Works

Stock dividends are uncommon but a useful option for many companies. Most companies pay cash dividends; however, some companies offer stock dividends for several reasons. Also, when investors receive cash dividends, they are not reinvesting their income. In the long-term, that can deplete their investments against inflation. The analysis of a company’s cash flow is a very revealing study of a firm. Screening for firms with attractive levels of price to free cash flow provides a useful technique to highlight more mature value stocks worthy of further study.

Cash Dividend VS. Stock Dividend: Differences and Which Is Better?

While cash dividends afford stockholders an immediate payout, stock dividends give shareholders much more flexibility to sell when they want. Dividends are a way  companies and mutual funds transfer profits to shareholders, rewarding them for their investment. Dividends are the cash or stock distributions that some companies and mutual funds pay to shareholders. While cash dividends result in immediate cash payments to shareholders, stock dividends increase the number of shares that investors in a company or fund own. Cash dividends may be preferred among income investors, but will require taxes to be paid. Meanwhile, stock dividends can be more valuable in the long run, especially if the company that issued them continues to grow.

How are stock dividends different from cash dividends?

Unfortunately, the calculation for dividend yields presents some problems. Dividend yields can vary wildly, so the calculated yield may actually have little bearing on the future rate of return (ROR). Additionally, dividend yields are inversely related to the share price, business entity concept broader look with example so a rise in yield may be bad if it occurs only because the company’s stock price is plummeting. The money for cash dividends comes directly from the company’s profits. Once the organization declares the dividend, it can’t reinvest the money into its business operations.

These dividends increase the total number of outstanding shares of a company. Theoretically speaking when stock dividend is issued, the share price decreases in the same proportion so as to keep the total market capitalization or market value of the company the same. Most companies pay cash dividends to their shareholders, but they can also ask investors to put their earnings back into the company through stock dividends. These payments work much the same, and the amount of profit being passed onto shareholders doesn’t change. It’s just a matter of whether the investor gets cash or shares in the firm. The financing segment of the cash flow statement examines how the company finances its endeavors and how it rewards its shareholders through dividend payments.

Stock dividends are also not taxable, unless they come with a cash option, making them more tax-efficient than their counterpart. Choosing between cash and stock dividends depends on your personal circumstances and objectives. If you need cash to meet your current needs, or if you want to diversify your portfolio, you may prefer cash dividends. If you want to increase your ownership stake in the company, or if you want to defer your tax liability, you may prefer stock dividends. You should also consider the impact of dividends on the share price, the earnings per share, and the dividend yield of the company.