Cash dividend vs. Stock dividend

This image illustrates how a dividend works.

We’re sure as you research more about investing, you’ll come across dividends. One common question that new investors often have is about dividends. What are they, and what’s the difference between cash dividends and stock dividends?

Cash dividends are paid directly in money, whereas in stock dividends you are paid in the form of stocks or other forms of value. Most brokers offer a choice to reinvest or accept cash dividends.

Cash Dividends:

Cash dividends are the most popular type of dividend. Cash dividends are like receiving a paycheck from your investments. When a company decides to distribute cash dividends, it’s essentially giving a portion of its profits directly to its shareholders. Here’s how it works:

  1. Payment in cash: If you’re a shareholder, you’ll most likely get a cheque in the mail or a direct deposit into your brokerage account.
  2. Regular income: Cash dividends are a way for investors to receive regular income from their investments. They’re typically paid on a quarterly basis, although some companies may pay them annually or semi-annually.
  3. No change in ownership: When you receive cash dividends, your ownership stake in the company remains the same. It’s like getting a share of the profits without altering your share of the company itself.
  4. Tax implication: Depending on your country, you may be taxed on the cash dividends you receive.

Example of cash dividends: Adidas

Stock Dividends

These types of dividends involve receiving additional shares of a company’s stock.

Here is what you need to know:

  1. Distribution in shares: Instead of giving out cash, a company issuing stock dividends provides shareholders with additional stocks instead of cash.
    • Example: If you own 100 shares and a company declares 10% stock dividend, you’ll receive 10 additional shares.
  2. Proportional ownership: Stock dividends don’t change the total value of your investment. They merely divide your ownership into more pieces. Your ownership percentage of the company remains the same, but you have more shares representing that ownership.
  3. No immediate cash: You will not receive any money in your bank account
  4. Tax implication: Depending on your country’s tax laws, stock dividends may have tax considerations.

Stock dividends: Johnson & Johnson, Coca-Cola

Cash dividends provide you with regular cash payments from your investments. Stock dividends offer additional shares in the company. Both have their pros and cons to consider, so it is important to weigh these factors when investing. Understanding the distinction between the two can help you to make an informed decision, and of course, if you are still confused it always helps to consult trusted and knowledgable adults.

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