Posted in Finance, Accounting and Economics Terms, Total Reads: 500
Definition: Cash-and-Stock Dividend
A company may decide to distribute a portion of its earnings to its shareholders as dividend payment. Dividends can be distributed in the form of cash payments, stock dividends, stock splits etc. A cash-and-stock dividend payment involves a dividend payment both in the form of cash and stock payments. A portion of the declared dividend is paid in the form of cash while additional shares of the company’s stock are issued for the remaining part of the dividend payment. The cash portion of the dividend is declared in dollars per share while the stock portion is declared as a percentage of the total shares owned.
A cash dividend results in the transfer of economic value of the company to its shareholders as it involves a cash payment from the earnings of the company that could have otherwise been used for operational activities. Thus, a cash dividend payment will result in a proportional fall in the share price of the company’s stock. The final cash amount received by the shareholders is lesser than the amount declared as they are required to pay part of the received dividend as tax.
A stock payment on the other hand does not affect the value of the company. A stock dividend payment results in an increase in the number of share outstanding but does not increase the total value of the company. As such, the number of shares owned by a shareholder increases but the proportional ownership of the shareholder in the company remains the same. The price of the shares decreases to reflect that the company value remains unchanged.
A cash-and-stock dividend is usually made to appease shareholders who may not prefer a full cash or a full stock dividend. Partial distribution of the dividend in the form of stocks reduces the tax payment that results from a full cash dividend while simultaneously, allowing the company to utilize the remaining part of the dividend for operations or growth plans.
Example: Suppose a shareholder owns 100 shares of a company. The company declares a cash-and-stock dividend payment of $0.50 per share plus a 5% of the total shares owned. This would result in a cash dividend of $0.50 x 100 = $50 and an additional 5% of 100 = 5 shares of the company’s stock.