Chapter 1: What is a Security? - D. Types of Dividends
CashA cash dividend is the most common form of dividend, and it is one that the test focuses on. A corporation will send out a cash payment in the form of a check directly to the stockholders. For those stockholders who have their stock held in the name of the brokerage firm, a check will be sent to the brokerage firm and the money will be credited to the investor’s account. Securities held in the name of the brokerage firm are said to be held in “street name.” To determine the amount that an investor will receive, simply multiply the amount of the dividend to be paid by the number of shares.
JPF pays a $.10 dividend to shareholders. An investor who owns 1,000 shares of JPF will receive $100:
1,000 shares x $.10 = $100.
StockA corporation that wants to reward its shareholders, but also wants to conserve cash for other business purposes, may elect to pay a stock dividend to their shareholders. With a stock dividend, each investor will receive an additional number of shares based on the number of shares that they own. The market price of the stock will decline after the stock dividend has been distributed to reflect that there are now more shares outstanding, but the total market value of the company will remain the same.
If HRT pays a 5% stock dividend to its shareholders, an investor with 500 shares will receive an additional 25 shares. This is determined by multiplying the number of shares owned by the amount of the dividend to be paid.
500 x 5% = 25