Question

Shareholders will always prefer a cash dividend to a share dividend". Do you agree? Please explain your answer.

Answer 1

CASH DIVIDEND

Company earns profit and out of such profit pays dividend to the shareholders in return of their capital invested in such shares. Such dividend is paid in form of cash (Cheque/online transfers). Hence company pays cash to the shareholder. For eg Co A pays 20% dividend on $10 Stock ie company will pay $2 as dividend.

STOCK DIVIDEND

Sometimes company earns profit but does not have sufficient cash funds in their hand or are facing liquidity crunch. Hence instead of declaring dividend, they issue BONUS SHARES to the shareholders out of Retained earnings of company and thus shareholders get extra shares free of cost. For eg Co B issues 1 equity shares for every 5 shares held by the shareholders.

BENEFITS OF CASH DIVIDEND

1. As in cash dividend, investor will receive cash in his hands but in stock dividend, he will not receive any cash but only shares in his Demat Account.
2. Cash dividend helps is Capital appreciation of the Investor as along with the shares he is also receiving cash but in stock dividend he does not actually receive anything. Because market value of company remains same in Bonus shares issue. He will get additional shares but market price of such shares will come down to compensate for such shares issued. Hence he would not be receiving anything.
3. Cash received as dividend could be reinvested by the share holder in any company of his choice but in case of stock dividend his money is only reinvested in that company.

BENEFITS OF STOCK DIVIDEND

1. Cash dividend is taxed by the government whereas bonus shares are not taxed, hence receiving stock dividend is better than the cash dividend.
2. Getting stock dividend instead of Cash dividend sometimes can make you multi millionaire. For eg Bill gates, Steve Jobs, Jeff Bezoz, they become richest persons because of the shares value multiplied. Hence stock dividend is great if you see company’s potential is good as per future aspects.

CONCLUSION

Hence shareholder will prefer dividend according to his needs. It is unfair to say which option is better, as both of them has its own advantages.