Stock Dividends, How Is It Superior To Cash Dividends?

Stock Dividends, How Is It Superior To Cash Dividends?

What are stock dividends?

Stock dividends most commonly are referred to as a method that involves annual payment in the form of shares rather than direct cash. This type of payment is usually done by companies to distribute wealth to their shareholders in the form of company shares only. In most cases, dividends at are issued by a company when there is a lack in liquid cash generated from the revenue, though the major decisions lie with the board of directors who decide when to declare payment through stocks and the form of payment.

What are the advantages of using stock dividends?

There are various benefits that a company enjoys when using stock dividends instead of cash. Some of which are discussed as follows.

  • Improves Cash Position for the company – There are situations when the company might not be generating enough liquid cash as revenue, this is one of those times when the company decided to pay through dividends. It allows the company to maintain and improve its current cash status.
  • Maintains an affordable price range for stocks –There are various circumstances, when payment occurs through stocks, the number of shares increases, and the price of the share decreases. On a positive note, the company’s shares become more affordable for the public or the shareholders.

For example, assume that there are two kinds of stocks, A and B. An investor has only $6000 to invest, Stock A is priced at $1000 and Stock B is priced at $1500, the investor would buy the cheaper one, Stock A in more numbers rather than investing on Stock B.

  • No tax consideration –As far as company policies go, there are no tax considerations when payment is done through stock Shareholders generally prefer this mode of payment because it is superior to cash payment as those are taxed.

Which is a better dividend, stock, or cash?

Cash dividends are used only when the company decides to use its cash to provide economic values to their shareholders instead of using it for company operations. But there are certain drawbacks associated with it. Assume that a company offers dividends in cash upto 5%, in this scenario, the value of the shares falls by 5% as well, plus there are various taxes levied upon cash dividends.

Though in the case of stock dividends in stock tracker app, the value of the shares will not increase, neither the company’s value. Since there is no tax levied on stock dividends, and it has a certain value when re-invested.

Hence, it can be concluded that dividends in the form of stocks have more value than that of cash dividends. Disclaimer: The analysis information is for reference only and does not constitute an investment recommendation.