DEFINITION of 'Accumulating Shares'

Accumulating shares is a classification of common stock given to shareholders of a company in lieu of or in addition to a dividend. By taking accumulating shares instead of cash dividends, shareholders don't have to pay income tax on the distributions in the current year; however, it is still mandatory to pay capital gains tax, if any, in the year when the shares are sold. Sometimes companies pay out these types of shares in addition to cash dividends. Accumulating shares are also referred to as stock dividends.

BREAKING DOWN 'Accumulating Shares'

A company's Board of Directors decides whether to pay dividends, how much and in what form. In almost all cases, dividends are paid in cash mainly because investors expect it. This is particularly true for stocks that are relied upon by investors for regular income. In some cases - for example, when a company wants to preserve cash on its balance sheet - accumulating shares are given to existing shareholders. Another reason for distributing these shares is to increase the number of outstanding shares, thereby boosting the liquidity in the public market. It is important to note that existing shareholder will not suffer dilution of their holdings because the shares are going to them instead of other investors. They retain proportional stakes in the company.

Accumulating shares are also a feature of mutual funds. A mutual fund investor is usually given the choice between receiving income distributions in cash from the fund or reinvesting the income back into the fund. If the investor opts for reinvestment, the income is used to purchase additional shares in the fund. Generally speaking, because equity prices tend to rise over time, the common money wisdom is to accept accumulating shares instead of cash dividends if you have a long time horizon and do not depend on dividend income for daily living expenses.

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