Dividends are earnings distributions to the stockholders of a corporation in proportion to the number of share held by the respective owners (Smith et al. 675). Dividends are normally declared at regular time intervals such as quarterly, semi-annually, or annually. Among the functions delegated by the stockholders to the board of directors is the power to control the dividend policy. Dividend distributions may take the form of cash, other assets, or stocks.
Cash dividend is the most common type of dividend. Cash dividend is the payment of a dividend in the form of cash (Smith et al. 678). Dividends in cash may be expressed as a certain amount of dollar per share or a certain percent of par or stated value. For the corporation, these dividends involve a reduction in retained earnings and in cash, while for the stockholders; a cash dividend generates cash and is recognized as revenue.
In a periodic share repurchase, corporation’s buys back its own shares of stock which increases stockholders ownership and reducing the total number of shares outstanding. Stock repurchase lessens the number of stocks in circulation. Corporations undertake periodic share repurchase for a variety of reasons. A corporation undertakes stock repurchase because of the presence of surplus profits or if the management assesses that the company’s stocks are undervalued.
Corporations repurchase their own stocks as a substitute for dividend. If I were the shareholder, I would prefer cash dividend over stock repurchase. With cash dividend, I can have the freedom of choice on what to do with the income I received and cash dividend provides a regular income on my investment. In addition, I can reinvest the money I received to buy additional shares of stock of the corporation, especially when the company issues an option such as dividend reinvestment plan.
Stock dividend is a type of property dividend wherein a “corporation may distribute additional shares of the company’s own stock” (Smith et al. 679-682). Stock dividends are distribution of the earnings of the corporation in the form of the company’s own share of stocks. Form the stockholders point of view; a stock dividend does not change the proportional ownership interests. Although the number of shares held by each individual stockholder increases, the total number of outstanding shares also increases resulting to unchanged proportionate interest of each stockholder. A stock dividend results to not only an increase in the number of shares outstanding, but also an increase in the capital stock balance, with no change in the value assigned to each share of stock on the company records because of the effect of transfer to from the retained earnings balance.
Stock dividend is not equivalent to receiving a cash dividend. The receipt of a stock dividend is non-economic event as far as the stockholder is concerned since form the corporations’ point of view a stock dividend involved no cash outlay. The assets of the corporation remain the same before and after the issuance of the stock dividend. Thus, if I were a stockholder, I would prefer to receive cash dividend than a stock dividend.
A stock split is a reduction in the par or stated value of stock accompanied by a proportionate increase in the number of share outstanding. A stock split divides the existing capital stock balance into more parts, with a reduction in the stated or legal value of each share. There are two types of stock split, the split up, and the split down. Split up increases the number of shares outstanding while reducing the par or stated value. Split down or reverse stock split on the other hand reduces the number of shares outstanding while increasing par or stated value. A stock split maintains the retained earnings balance and the capital stock balance unchanged. Thus, stock split results to same proportionate interest for a stockholder.