What is a Scrip Dividend?

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, we will discuss scrip dividends. We'll provide the definition, examples and reasons why a company may elect to have a scrip dividend instead of a cash dividend.

Widget Inc. Issues Scrip Dividend

You were flipping through the business section of your local paper when a headline caught your attention: ''Widget Inc. Issues Scrip Dividend - Mgmt. Says They Want To Save Their Cash''. You read the article, but even then, you have some unanswered questions. What is a scrip dividend? And why would a company elect to have one?

In this lesson, we'll answer those lingering questions. We will also walk through an example with the hypothetical company, Widget Inc.'s, financial information, and then describe why a company, like Widget Inc., would elect to have a scrip dividend.

Scrip Dividend - Definition

A scrip dividend program is when a company instead of automatically giving their shareholders a cash dividend, gives their shareholders the choice of either receiving a cash dividend or the equivalent in additional shares of the company.

Example

For example, let's say Widget Inc.'s share price is $10.00. The company pays $3.00 once per year as a dividend. You own 100 shares. If Widget Inc. has a scrip dividend program, then you can choose to receive:

  1. $3.00 x 100 shares = $300.00 in cash, or
  2. $300 / $10 = 30 additional shares of Widget Inc.

If you elect to receive cash, you can still use the money to buy additional shares in the company, but if you elect to receive additional shares, the scrip dividend just reinvests the dividend for you. So, you can think of a scrip dividend as a way to automatically reinvest in the company with minimal costs. For example, if Widget Inc. paid $3.00/share the following year and you elected to have a scrip dividend last year then your total shares would be 130 and you would have $130 x $3.00/share = $390 in dividends.

Reasons For a Scrip Dividend

There are several benefits both the shareholder and company receive with a scrip dividend relative to a typical cash dividend.

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