Talking Cents

Small business accountants in Melbourne explain the difference between a cash dividend and a share dividend

Stock dividends are thought to be superior to cash dividends as long as they are not accompanied with a cash option. Our small business accountants in Melbourne identify that shareholders will usually prefer a share dividend over a cash dividend for the following reasons.

A stock dividend is an increase in the amount of shares of a company with the new shares being given to shareholders. This does not increase the value of the company. Our business accountants in Melbourne believe that the benefit of a stock dividend is choice. The shareholder can either keep the shares and hope that the company will be able to use the money not paid out in a cash dividend to earn a better rate of return, or the shareholder could also sell some of the new shares to create his or her own cash dividend. Our small business accounting services in Melbourne want to emphasise that the biggest benefit of a stock dividend is that shareholders do not generally have to pay taxes on the value. Taxes do need to be paid, however, if a stock dividend has a cash-dividend option, even if the shares are kept instead of the cash.

The consequence of cash dividends is that receivers of cash dividends must pay tax on the value of the distribution, lowering its final value. Cash dividends are beneficial, however, in that they provide shareholders with regular income on their investment along with exposure to capital appreciation.

For more information regarding cash dividends and share dividends, please contact our small business accountants in Melbourne today.