When a corporation in which shareholders own shares generates profits and chooses to distribute them, this is known as a dividend. There are two types of dividends that a company can distribute to its shareholders: cash dividends and stock dividends.
Cash dividends are the most common type of dividend. They are paid out in cash, and shareholders can immediately use the money to reinvest in other stocks, pay bills, or save for retirement. However, cash dividends are taxed at a higher rate than stock dividends.
Stock dividends are less common, but they can be a more tax-efficient way to distribute profits to shareholders. When a company declares a stock dividend, shareholders receive additional shares of the company instead of cash. These shares can be sold for cash but are often held onto as a long-term investment. Stock dividends are taxed at the capital gains rate, which is lower than the rate for cash dividends.
What is a Cash Dividend?
A cash dividend is a payment made by a corporation to its shareholders out of its profits or reserves. A portion of a company’s earnings is distributed to shareholders. Cash dividends are usually paid out quarterly.
To understand the cash dividend meaning better, let us take an example. For instance, banks often distribute a specific proportion of their profits as cash dividends. The dividend policy may be changed or delayed till a period of higher earnings. Companies often distribute funds to shareholders through cash dividends.
Cash dividends are the top sources of income if you want to buy stocks regularly for income. Investors typically get cash payouts every three months if a dividend is announced. This may be regarded as a reward for your financial commitment to the business. The distribution of cash dividends is only sometimes the case, though.
What is a Stock Dividend?
Stock dividends are payments made by a company to its shareholders out of its profits or reserves. They are usually paid in the form of additional shares of stock but can also be paid in cash. Stock dividends are a way for companies to share their profits with their shareholders and can also be used to raise capital. They are typically paid quarterly but can be paid more or less often, depending on the company’s policy.
Your shares would rise by 10% if a company declared a 10% stock dividend. If you previously owned 1,000 shares of the corporation, you now own 1,100.
Smaller businesses frequently offer stock dividends to boost market liquidity and the number of shares available.
Difference between Cash Dividend and Stock Dividend
The main difference between stock and cash dividends is that stock dividends represent a distribution of the company’s assets, while cash dividends represent a distribution of the company’s profits.
For example, if a company has ₹1,00,000 in assets and declares a 10% stock dividend, then each shareholder would receive an additional ten shares of stock. However, if the company instead declares a 10% cash dividend, then each shareholder would receive a cash payment of ₹10,000.
Another difference between the two types of dividends is that stock dividends are typically paid out of the company’s assets, while cash dividends are paid out of the company’s profits.
For example, if a company has ₹1,00,000 in assets and declares a 10% stock dividend, then the company’s assets would be reduced by ₹10,000 (the cash value of the 10% dividend). However, if the company instead declares a 10% cash dividend, then the company’s profits would be reduced by ₹10,000 (the cash value of the 10% dividend).
Finally, stock dividends are often seen as a more mild form of dividend because they do not require the company to dip into its profits. On the other hand, cash dividends are often seen as a more immediate form of dividend because shareholders receive a cash payment that can be used at their discretion.
Conclusion
Although stock dividends have an obvious advantage in that they allow for increased ownership at no cost, which may also benefit from a capital gain if stock prices rise, there is also a larger market risk.
On the other hand, cash dividends are one-time guaranteed distributions that take place as components of dividend payments. Keep in mind that firms are not required to declare dividends. Rather, it is only a perk or incentive that businesses provide to shareholders in exchange for their confidence (and investment) in the business.
Researching a company’s background and dividend plan before investing in it is vital to ensure that your investment strategy matches the company you choose. Typically well-established, healthy corporations declare cash dividends while emerging companies declare stock dividends. This may impact your choice.