Those who are related to stock exchange, share markets or share bazaars are familiar with dividend. Dividend is a bonus payment from a firm’s net earnings that is paid among the existing shareholders. Dividends are desirable from the shareholders point of view because they want to increase their current wealth.
Kinds of dividends
Dividend is a payment made out of a firm’s earnings to its owners.The dividend may be in the form of either cash or stock. So dividend is of two types.
Cash Dividend: Most companies pay dividend in cash. A company should have enough cash in its balance when it declares cash dividend. The cash account and reserve account of a company will reduce when cash dividend is paid among the shareholders. The market price of share drops in most cases by the amount of the cash dividend distributed.
Stock Dividend: An issue of bonus shares or stocks represents a distribution of shares among the existing shareholders as an alternative way of cash dividend. The shares are distributed among the shareholders proportionately. Thus the shareholder retain their proportionate ownership of the company. Bonus shares represents a recapitalization of the owners’ equity portion. When a company declares stock dividend, it means the company has a lack of liquidity.
Differences between stock dividend and cash dividend:
Stock dividend and cash dividend are both dividends but there are some remarkable differences as we notice.
1.When stock dividend is paid among shareholders, the total number of shares increase but in cash dividend, the total number of shares do not increase.
2.Stock dividend decrease reserve funds and retained earnings. In cash dividend, capital doesn’t decrease but cash balance decreases.
3.Stock dividend saves cash balance. Cash dividend decreases cash balance.
4.Stock dividend policy is applied when has lack of liquidity. Cash dividend policy is applied when a company has adequate cash.
5.The financial conditions of a company don’t change with stock dividend declaration. The financial conditions of a company changes with cash dividend declaration.
6.Stock dividends are costly than cash dividends. Cash dividends are more cheaper than stock dividend.
7.Maximum shareholders prefer stock dividend. Cash dividends are preferred by less number of shareholders.
8.Stock dividend is not included in taxable income. Cash dividend is included in taxable income.
Why maximum shareholders prefer bonus shares or stock dividends?
Stock dividends don’t affect on the wealth of shareholder. It brings some advantages . Shareholders prefer stock dividends for some reasons.
1.When shareholders receive stock dividends, it is not included in the taxable income. They can sell more shares, receive more money with less paying capital gain tax.
2.When a company declares stock dividend, the existing number of shares of shareholders increase.
3.Stock dividend may have a favorable future effect among shareholders.It may increase the equity of shareholders.
4.Stock dividend has a psychological effect on shareholders. The receipt of bonus shares gives them a chance to sell their shares at a higher price at any time.