Compare a regular cash dividend with a periodic share ...



Compare a regular cash dividend with a periodic share repurchase. Which has greater appeal to you? Explain.

Explain a stock dividend and further explain if you would prefer it to a cash dividend.

What are stock splits and how desirable are they?

Be sure to give some clear thought to the idea of dividend reinvestment versus receiving a dividend in cash. Each strategy works well; it depends on the investor as to whether it is the right one or not.

Solution

Regular cash dividends are cash payments by a company to its shareholders. When a company makes a profit, some of it is reinvested in the business and some is paid to shareholders as a dividend. The dividend to be paid out to shareholders must be declared by its board of directors and will usually be distributed quarterly. Regular cash dividends are the most common type of cash distribution and because these dividends are considered income, they are taxable in the year they were paid.

            Periodic share repurchase is another type of cash dividend; however, it is less common. This plan gives shareholders the option to sell back their shares to the company at a set price, which is higher than market price at the time the repurchase offer is made.

            Periodic share repurchase is more desirable to me even though I may have to reduce my holdings. In choosing this periodic share repurchase I am given the option to sell my shares or not. If I do choose to sell my shares back to the company I can do so at a higher than market price. Also with this choice, there could be tax advantages.

            In the case that a company does not have sufficient cash to reward their shareholders, they will reward them with stock dividends. Stock dividends are not cash dividends; rather they are shares of a company’s stocks. Stock dividend distributions are generally acknowledged in the form of fractions paid per share. For example, If I owned 100 shares in IBM and the management decided to declare a 5% stock dividend then I would receive 5 more shares.

            Even though I have more shares, I have no more earning potential than I did with my original 100 shares. Unfortunately, the day dividend is paid the stock goes down by the same percentage, so in this case I would prefer a cash dividend because I am not gaining on the stocks.

            Stock splits are similar to that of stock dividend and are no more desirable than a stock dividend. A stock split may happen if a company believes the price of their stock exceeds the amount that smaller investors are willing to pay for the stock. In the case of split stock the price of it decreases. For example if I were to own 100 shares in a company valued at $50 a share, and it declares a 2 for 1 split, I actually own 200 shares at only $25 a share. A split has no effect on the value of what shareholders own. Companies will typically declare a split stock to lower their stock price and broaden its market appeal. By reducing the price of the stock, companies try to make their stock more affordable to these investors.

            I would want to make certain that I did all the research needed on the companies that I am interested in investing in doing so I will know how each company rewards their shareholders. Although non-cash dividends may be appealing to some, they are not appealing to me. I would rather have the cash dividends, sure each dividend payment may differ, either higher or lower than the last, I would feel that my investment was worthwhile. If I chose stock dividend, I would not feel that I had invested well even though I actually may have. The most important part of investing is really understanding how and why companies choose to reward their shareholders as well as the reasons you are investing yourself, whether it is short term or long term and what you hope to expect from your investments.

 

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