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Scrip Dividend vs. Stock Dividend

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, we'll compare scrip dividends with stock dividends. Both are common ways companies reward shareholders. We'll give the definition of each and explain the concepts through two scenarios.

Scrip Dividend or Stock Dividend?

You are sitting at the dining room table having dinner with your parents, Doug and Ann. Both are business people. In fact, they run a publicly-traded company that is based out of your home town. The company has been doing well. They even started to pay cash dividends last year, and they want to try something new to reward the shareholders this year. There are two proposals, in particular, that are being debated: should the company adopt a scrip dividend or issue a stock dividend?

Let's explore both concepts further. In this lesson, we will give the definitions for both a scrip dividend and a stock dividend. We'll then walk through an example of each using hypothetical numbers from the publicly traded company your parents run. We will call the company Undecided Inc.

Definitions

A scrip dividend program is when a company offers shareholders an option to receive dividends in two different forms: cash or additional company stock. A stock dividend is a little different. Instead of giving cash, or even the option of cash or shares, the company just gives the shareholders additional shares. So there is no option, like with a scrip dividend, and no cash, like with a cash dividend. There are just additional shares.

Two Scenarios

Let's go through two scenarios: Scenario 1 - Undecided Inc. offers a Scrip dividend and 50% of the shareholders elect to receive additional shares, and Scenario 2 - the company pays a stock dividend. Let's assume that Undecided Inc.'s current market price is $50. There are 1,000 shares outstanding. The market capitalization of Undecided Inc. is then $50 x 1,000 shares = $50,000. And the company pays a dividend once per year of $3.00 per share.

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