Scrip dividends

The issue of scrip dividends is part of a wider discussion on dividend policy with financial management. .

A scrip dividend is where a company allows its shareholders to take their dividends in the form of new shares rather than cash.

Do not confuse a scrip issue (which is a bonus issue) with a scrip dividend.

Arguments for and against scrip dividends

• The advantage to the shareholder of a scrip dividend is that he can painlessly increase his shareholding in the company without having to pay broker's commissions or stamp duty on a share purchase.
• The advantage to the company is that it does not have to find the cash to pay a dividend and in certain circumstances it can save tax.

Some companies give shareholders the choice between cash and scrip dividends. In such cases the terms of the choice are usually designed so that the shareholder who chooses the scrip sees their wealth increase with a fall in wealth if cash is chosen. Such an arrangement is called 'an enhanced scrip'.

A scrip dividend effectively converts retained profits into permanent share capital.

There can be a number of advantages to a scrip dividend rather than cash:

• Preservation of cash for re-investment.
• Unless significant, a scrip issue will not dilute the share price.
• More shares reduce the company's gearing and hence increase its borrowing capacity.
• Shareholders get more shares without incurring transaction costs.
• Shareholders may get a tax advantage if dividends in the form of shares rather than cash.

One major disadvantage in these scrip dividend plans is that shareholders receive no cash with which to pay taxes on the dividends.

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Tags:	dividends;dividend policy;scrip dividends;dividend