The term scrip dividend refers to the process of providing shareholders with the choice of receiving a cash dividend, a dividend at a future point in time, or common stock. When a corporation issues a scrip dividend, they're allowing shareholders to increase the size of their holdings without incurring any fees.
At one time, it was common for a corporation low on cash to offer shareholders a scrip dividend in lieu of cash. This was also termed a liability dividend, since it gave the shareholder a promissory note they could convert into cash at a future point in time.
More recently, scrip dividends are offered by corporations that want to provide their shareholders with the option to receive common stock in lieu of the cash dividend. This is referred to as a capitalization issue.
Scrip dividends tied to common stock allow the issuing company to retain and provide investors with the ability to increase their holdings in the corporation. Not only can this lower the costs associated with acquiring shares of stock, but it can also provide the investor with a tax advantage too. For example, the investor is realizing a capital gain instead of income. The capital gain may be taxed at a lower rate than ordinary dividends.
When issuing the scrip dividend, the company will specify the exchange rate. For example, if the company's shares are selling for $25.00 and the cash dividend was $1.00, the investor might be offered a scrip dividend that enables them to receive one share of stock for every 25 they own.
promissory note, capital stock, dividends payable, dividend, cash dividend, property dividend, liquidating dividend, stock dividend
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