Which is better a cash dividend or a stock dividend?

The purpose of dividends is to return wealth back to the shareholders of a company. There are two main types of dividends: cash and stock. A cash dividend is a payment made by a company out of its earnings to investors in the form of cash (check or electronic transfer). This transfers economic value from the company to the shareholders instead of the company using the money for operations. However, this does cause the company's share price to drop my roughly the same amount as the dividend. For example, if a company issues a cash dividend equal to 5% of the stock price, shareholders will see a resulting loss of 5% in the price of their shares. This is a result of the economic value transfer. Another consequence of cash dividends is that receivers of cash dividends must pay tax on the value of the distribution, lowering its final value. Cash dividends are beneficial, however, in that they provide shareholders with regular income on their investment along with exposure to capital appreciation. A stock dividend, on the other hand, is an increase in the amount of shares of a company with the new shares being given to shareholders. For example, if a company were to issue a 5% stock dividend, it would increase the amount of shares by 5% (1 share for every 20 owned). If there are 1 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. This, however, like the cash dividend, does not increase the value of the company. If the company was priced at $10 per share, the value of the company would be $10 million. After the stock dividend, the value will remain the same, but the share price will decrease to $9.52 to adjust for the dividend payout. The benefit of a stock dividend is choice. The shareholder can either keep the shares and hope that the company will be able to use the money not paid out in a cash dividend to earn a better rate of return, or the shareholder could also sell some of the new shares to create his or her own cash dividend. The biggest benefit of a stock dividend is that shareholders do not generally have to pay taxes on the value. Taxes do need to be paid, however, if a stock dividend has an cash-dividend option, even if the shares are kept instead of the cash. Stock dividends are thought to be superior to cash dividends as long as they are not accompanied with a cash option. This is due to the choice that stock dividends offer compared to cash dividends. But this does not mean that cash dividends are bad, they just lack choice; a shareholder could still reinvest the proceeds from the cash dividend back into the company through a dividend reinvestment plan. Read more: http://www.investopedia.com/ask/answers/05/stockcashdividend.asp#ixzz1pgOjMZAi

Cash vs. Stock Dividends

by Jim Fink on March 28, 2011 in Stocks to Watch Cash dividends are, of course, the surest way to build wealth. Roger Conrad, Big Yield Hunting The bigger the company, the more likely it is to pay a dividend. Whereas more than three-quarters of the companies in the S&P 500 pay a dividend, only about half of all U.S.-listed firms pay one. According to academic studies from 2005 (p. 797) and 2010, of those companies that do pay a dividend, the vast majority pay out cash, but 8% pay out dividends in the form of additional shares of stock: Type of Company % of Companies That Pay Dividends 78% 70% 39% 25%

S&P 500 Utilities and Financials Non-S&P 500 Non-Utilities and Non-Financials

Recent examples of companies that pay stock dividends include Southside Bancshares (NasdaqGS: SBSI), TGC Industries (NasdaqGS: TGE), Parke Bancorp (NasdaqCM: PKBK), and Fort Orange Financial (OTC BB: FOFC.OB), Why would a company or an investor prefer one type of dividend over the other? And whats the difference between a cash dividend and a stock dividend?

Mechanics of Stock Dividends

A stock dividend is similar to a stock split a company issues new shares to stockholders in some proportion to the shares outstanding. Any stock dilution of 25% or greater is considered a split, so a 5for-4 exchange is a stock split, not a stock dividend. Stock splits simply reduce the par value per share of stock outstanding. In contrast, stock dividends require the shifting of retained earnings into the companys capital stock account, which reduces the cash available to pay out classified as a dividend. Cash paid out that is greater than retained earnings is classified as a return of capital. Most stock dividends are in the 5% to 15% range. If a company pays a 5% stock dividend, each shareholder will receive one new share for every 20 shares they own. So a shareholder with 100 shares will own 105 shares after the dividend is paid. The total value of the firm does not change:

Cash vs. Stock: 5% Dividend Cash Dividend Stock Price Before Dividend Cash Dividend Per Share Number of Shares Before Dividend Number of Shares After Dividend Stock Price After Dividend Total Value After = (Shares After * Stock Price After) + Cash Dividend $10 $0.50 100 100 $10 $0.50 = $9.50 100 * $9.50 + $50 = $1,000 Stock Dividend $10 $0 100 105 $10 * (100/105) = $9.5238 105 * $9.5238 + $0 = $1,000

Neither a cash nor a stock dividend 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 stock dividends. A stock dividend is not taxable until sold that is, if stock is the only option offered. Shareholders that are given the option of receiving either stock or cash dividends will be taxed even if they choose stock. In contrast, a cash dividend is always immediately taxable. Note: the cash distributions of MLPs are not considered dividends and are almost entirely taxdeferred! Check out MLP Profits to learn more. Stock dividend proponents argue that a stock dividend 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. I guess holding on to a stock dividend can be considered a form of reinvestment, but keep in mind that it is a type of reinvestment that just maintains and does not increase ones ownership stake in the company.

Cash is King
Cash dividend proponents (including me) argue that requiring a company to return cash imposes fiscal discipline and prevents the company from squandering shareholder wealth. Furthermore, since many shareholder recipients of cash dividends do not reinvest them (silly them!), those that do reinvest gain a greater share of future company profits. And if you reinvest the cash when the stock price is low, all the better! In contrast, recipients of stock dividends cannot increase their ownership stake in the company without shelling out additional cash from their pocket. 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. Dividends (especially of the cash variety) do the work for you.

Bottom Line: What Floats Your Boat?

It all comes down to your evaluation of managements capital allocation skills (and integrity), the companys legitimate cash needs, and your own cash needs. Personally, I think cash dividends keep management honest and I want to own companies that pay them even if I dont need the cash. I also like to increase my ownership stakes in solid companies without the need to find new cash.

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