Some investors choose to invest in companies that will pay them dividends. Not every company does this – and of those who do, not every company pays dividends in the standard way.
Instead, some companies will offer scrip dividends to their shareholders. But what exactly are these, and how do they work?
What are scrip dividends?
Sometimes a business may not have enough cash to pay dividends to shareholders as normal. Alternatively, they may have cash available but want to reinvest this in the business in a bid to grow further.
Existing investors, however, will still be expecting dividends. In this situation, the company may offer brand new shares to shareholders – and these are known as scrip dividends.
The pros and cons of scrip dividends
For businesses, offering scrip dividends can save money: with no need to pay cash dividends, they can use the money saved elsewhere. This could potentially enable the company to grow, increasing the likelihood of greater cash dividends down the line.
However, it can also make the market think negatively about the business. It may make investors believe that the company is short of cash, and it may put investors off investing as a result.
For investors, scrip dividends are an easy way to increase shareholdings in a business without having to pay broker fees – and there may also be tax benefits to doing this instead of receiving cash dividends. However, if a company suddenly starts to pay scrip dividends when an investor is used to receiving cash dividends, the investor could be impacted by the reduction in the cash they receive – and will still have to declare these scrip dividends.
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