What Is Cash-and-Stock Dividend?
Cash-and-stock dividend, as its name implies, is when a corporation distributes earnings to its shareholders in both cash and stock as part of the same dividend. The cash portion of the dividend is expressed in cents or dollars per share owned, and the stock portion is expressed as a percentage of the number of shares owned.
What Is A Dividend?
Understanding Cash-and-Stock Dividend
Cash-and-stock dividend may be understood by the following example: A shareholder owns 100 shares of XYZ Corporation. The company declares a stock-and-cash dividend of 25 cents per share, plus 10 percent of the shares owned. For the shareholder, this would result in a $25 cash dividend (25 cents per share multiplied by 100 shares) and 10 additional shares of stock (100 shares owned multiplied by a 10 percent stock dividend rate).
Benefits of a Cash-and-Stock Dividend — Shareholders’ Perspective
Separately, cash dividends and stock dividends each have specific advantages and disadvantages. Combined then, an inherent benefit of a cash-and-stock dividend could be to help mitigate the disadvantages of one payout method with the advantages of the other. In thinking about the considerations below, it becomes clear that in some cases a cash-and-stock dividend could offer shareholders more flexibility than could either one alone. And for some, a cash-and-stock dividend might be a better deal because it affords more options of how to handle the dividend.
Cash Dividend Considerations:
- Cash payments offer you the advantage of choosing whether to reinvest the dividends or not.
- But if you do decide to reinvest your cash dividend back into the company, its growth rate would be slower than that of a stock dividend.
- There are heavy tax implications with cash dividends. In the United States, they are subject to up to 20 percent federal withholding taken directly off the top. Then, at year-end, you also must report the dividend to the Internal Revenue Service (IRS) as income, which can shave as much as another 25 percent off of your return.
Stock Dividend Considerations:
- If you collect a stock dividend, then 100 percent of your payout is reinvested into the company, which allows the dividend to grow much faster than the typical cash dividend reinvestment.
- However, taking a dividend in shares continually exposes it to a company’s operational risk. Meaning, if the business begins to underperform and the company’s stock value plunges, then your dividend would plunge along with it.
- A stock dividend also may be taxed. However, unlike cash dividends, stock dividends are not reported as income, but as capital gains, and are taxed at a much lesser rate.
Why Might a Company Wish to Offer a Dividend in Both Cash and Stock?
Paying a cash dividend leaves a company with less money to work with, and paying in stock preserves the company’s purchasing power. So if a cash-and-stock dividend is used instead of just one or the other, a company could conserve a portion of its cash for its continued growth. This is especially useful 1) if a company is experiencing a temporary cash-flow shortfall; 2) for those that depend upon their revenue to operate, such as banks and mortgage lenders; or 3) for companies, like pharmaceuticals, that need cash on hand for research and development (R&D).
Corporations always benefit from keeping shareholders' interests at the forefront. So if a company believes that half of its investor base prefers cash and the other half prefers stock dividends, for example, then perhaps the company is trying to keep all its shareholders happy simultaneously. In addition, by distributing a portion of the dividend in stock, the company potentially could be helping shareholders to minimize some of the tax burdens of cash dividends.