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Scrip Dividend: Advantages & Disadvantages

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, we'll discuss what a SCRIP dividend is and what the advantages and disadvantages it has for both the shareholders and the issuing company.

Cash or Shares

''Soft serve or hard serve ice cream,'' Coke or Pepsi,'' ''soup or salad'' It's always good to have options. How about ''cash dividend or shares?'' In fact, that's the question the issuing company asks if it offers a SCRIP dividend program. As an investor, you have the option to either receive a cash dividend or the equivalent amount in shares of the company.

In this lesson, we'll discuss a SCRIP dividend program in further detail, and we'll describe the advantage and disadvantages of this program both for the shareholder and for the company.

SCRIP Dividend

A SCRIP dividend program is when companies offer their shareholders the right to receive dividends in either the form of cash or shares in that company. For example, let's say Widget Inc's share price is $50. They pay $2.50 once per year as a dividend, and you own 100 shares. If Widget Inc. has a SCRIP dividend program then you can either receive 1) $2.50 x 100 shares = $250 in cash, or 2) $250 / $50 = 5 additional shares in the company.

Shareholder: Advantages and Disadvantages

Advantages for the Shareholder Include:

  • They are given the option. It is always good to have options, because then you can pick the best choice for you. Shareholders, in particular, have different needs. One investor may be a retiree who depends on cash dividends to pay their living expenses. They would choose the cash dividend option. On the other hand, a younger, wealthier investor may want to own more shares so they can capture future price appreciation. The SCRIP dividend program allows each shareholder to be happy.
  • If a shareholder also thinks the shares are undervalued, they would like the SCRIP dividend and would elect to receive shares. In fact, they will not have to pay transaction costs which they would have incurred had they bought the same number of shares through their brokerage account.

Disadvantages for the Shareholder Include:

  • Unfortunately, if a shareholder elects to receive shares, instead of cash, they still need to pay ordinary income tax on the receipt. If the shareholder does not have the cash available on hand, they may be forced to sell some shares to cover the tax liability.

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