A dividend is when a corporation chooses to distribute some of its earnings to some of its shareholders. Sometimes, corporations have an obligation to do so. For instance, preferred shares have been compared to liabilities because preferred shareholders are entitled to receive dividends on a regular basis. However, most dividends are handed out when corporations choose to hand them out even if expectations can become a force as powerful as legal obligation. In any case, dividends can come in a number of forms, as shown by how there are both cash dividends and stock dividends.
What Is a Cash Dividend?
Cash dividends are dividends paid out in cash rather than some other kind of asset. As such, they are the most common dividends out there, so much so that when someone says just dividend, chances are very good that they are referring to cash dividends rather than some other kind of dividend.
Perhaps unsurprisingly, cash dividends come in a wide range of forms. For example, some of them are paid out on a regular basis, with monthly, quarterly, and annually being very common. In contrast, others are paid out on special occasions, which is why they are called special dividends. Thanks to this, interested individuals should remember that cash refers to what is being paid out and nothing but what is being paid out, meaning that they shouldn't lose sight of the rest.
Why Is a Cash Dividend Handed Out?
The sheer range of cash dividends means that there can be a wide range of reasons why corporations choose to pay them out. Sometimes, corporations have reached a mature point in their life cycle, meaning that they have run out of convenient opportunities for further expansion. As a result, when they make a profit, they don't have a lot of incentive to reinvest those earnings into their revenue-earning operations. Instead, it makes more sense for them to hand those earnings over to their shareholders in the form of dividends. Other times, corporations might be more focused on how dividends can be used to put them in a better position when it comes to their shareholders. Simply put, most people like money, which is why dividends can make shareholders happier as well as increase the chances of shareholders choosing to hold on to their shares. Something that can be very useful for corporate executives because that increased sense of shareholder loyalty can empower them to pursue more long-term investments rather than be forced to focus on short-term profit maximization at the expense of other considerations. On top of this, there are times when corporations will receive unexpected windfalls for one reason or another, with the result that they will choose to hand them out rather than hold on to them because they don't have any plans in mind.
What Is a Stock Dividend?
Stock dividends are the same kind of occurrence as cash dividends save that they are paid out in stocks rather than in cash. However, it is important to note that this has some important consequences for what happens as well as what interested individuals can expect.
For instance, stock dividends might be more advantageous than cash dividends when it comes to the issue of taxation. Basically, stock dividends offer stocks, which don't get taxed until the shareholder chooses to sell their shares. However, this might not be the case if the dividend was offered in either cash or stocks, in which case, interested individuals might be obligated to pay taxes even if they chose the latter over the former. Regardless, taxation is always a serious matter, which is why shareholders should look further into it for their particular jurisdiction so that they won't make any mistakes.
Besides this, it is worth mentioning that stock dividends tend to have an effect on the share price. After all, the value of the corporation hasn't changed. However, a stock dividend means that the same value is now represented by an increased number of outstanding shares than before. On top of this, corporations like to issue stock dividends when something is about to change the share price anyways, so that is something to keep in mind as well.
Why Is a Stock Dividend Handed Out?
Every single reason that a corporation can have for paying out a cash dividend can be applied to paying out a stock dividend as well. However, the latter tends to happen when the corporation doesn't have enough cash on hand to cover such a payout, which can happen because profitability is by no means guaranteed to come hand-in-hand with good net cash flow. As such, there will be times when corporations find a stock dividend to be much more convenient than a cash dividend even though the former can have quite an effect on their accounts.
Otherwise, the different effects of stock dividends means that those can be a reason to use them as well. For instance, there are times when corporate executives will want to lower their share price for whatever reason. Combined with their other effects, that could be enough for them to declare a stock dividend because that is the most effective way for them to get what they want out of the whole situation.
What Is the Difference Between a Cash Dividend and a Stock Dividend?
Summed up, the main difference between a cash dividend and a stock dividend is that one is paid out using cash while the other is paid out using stocks. However, that one difference leads to a whole host of other differences, with the result that what should be very similar in nature can turn out to be very different in everything from how they are accounted for to how they are used by corporate leadership.
Due to this, interested individuals should pay very close attention to when a corporation uses cash dividends versus when a corporation uses stock dividends. These things do not happen without good reason. As a result, interested individuals can definitely use them as a chance to glean insight into a corporation's inner workings. This is particularly true for stock dividends rather than cash dividends because while they are relatively common, they are nonetheless much rarer than their cash-based dividends, meaning that their use could be signalling something interesting going on.
Written by Allen Lee
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