The Difference Between a Cash Dividend and Stock Dividend

The company benefited from new projects added to the portfolio, a reduction in incentive distribution rights (IDRs) paid to its parent company (NextEra Energy), and other factors. These positive earnings drivers more than offset the negative impact from lower earnings at existing projects and the sale of its Texas natural gas pipeline portfolio (STX Midstream) to Kinder Morgan. This week’s first dividend stock is Enterprise Products Partners (EPD), a midstream energy services provider. The limited partnership has increased its cash distribution for 25 consecutive years at a compound annual growth rate of 7%. In February, Meta announced its fourth quarter and full year earnings for 2023, and said it would offer its first-ever dividend to investors.

• Unlike stock dividends, cash dividends are fully taxable to the recipient.
• While the overall value of the company remains the same, stock dividends increase the number of shares that exist, resulting in a slightly diluted stock price.
• Dividends act as an important tool in the corporate world, allowing investors in a company to generate cash from their investments without needing to sell shares.
• The company produced free cash flow of $199.4 million, which meant its payout ratio was only 63%.
• If the transaction is for a greater proportion of the previously outstanding shares, then treat the transaction as a stock split.
• Stock dividends increase the stockholder’s proportionate ownership of the company.

The real choice at hand is whether or not you will choose to reinvest your cash dividend or sell your stock payment for cash. Here are some factors to think about if you’re unsure which choice is right for you. There aren’t any special risks that come along with cash dividends because you’re paid in cash. The only risk is the same risk of inflation that affects any cash savings you keep.

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Like the name implies, a cash dividend is a payment of cash that a company makes to its shareholders. Rather than reinvesting profits into the business, cash dividends allow a company to redistribute a portion of its earnings to investors to reward them for owning shares. Separately, cash dividends and stock dividends each have specific advantages and disadvantages. Combined, then, an inherent benefit of a cash-and-stock dividend could be to help mitigate the disadvantages of one payout method with the advantages of the other. In thinking about the considerations below, it becomes clear that in some cases, a cash-and-stock dividend could offer shareholders more flexibility than either one alone.

Getting part of the profits will help them feel like they have been given a stake in a profitable venture rather than a person subject to the whims of the stock market. In most cases, you won’t have a choice about how to receive your dividend. Otherwise, the different effects of stock dividends means that those can be a reason to use them as well. For instance, there are times when corporate executives will want to lower their share price for whatever reason.

Definition of Dividends Account

What they need to realize is that 10 years ago, its payout was $1.79 per share. Over the years, the dividend has grown 287%, meaning an investor’s yield on cost would have nearly quadrupled as well. That’s played out with UnitedHealth stock, which has grown its revenue, profits and dividend in excess of 10% annually over the past decade. The dividend had a 21% CAGR over that period, while its current FCF ratio at the end of 2023 was 10%. As with the other stocks on the list, I’m uncertain if Brookfield Renewable will manage to hit Wall Street’s price target. However, I’m on the same page as analysts about the company’s long-term prospects.

Both dividends are currently well covered, and their balance sheets are solid. Vector did slash its dividend in 2020 but for good reason, as its dividend payments were more than its operating cash flow. Investors often measure the dividend appeal of a certain investment security is via the dividend yield. Dividend yields are expressed as a %, and reflect the annual dividend value relative to the latest share price.

Understanding Cash-and-Stock Dividend

So if a cash-and-stock dividend is used instead of just one or the other, a company could conserve a portion of its cash for its continued growth. Every single reason that a corporation can have for paying out a cash dividend can be applied to paying out a stock dividend both cash dividends and stock dividends as well. As such, there will be times when corporations find a stock dividend to be much more convenient than a cash dividend even though the former can have quite an effect on their accounts. A stock dividend has no immediate tax consequences for the recipient.

Growth in the firm should result in future changes to your lifestyle, either in the form of nicer things or financial freedom. Sarah Edwards is a finance writer passionate about helping people learn more about what’s needed to achieve their financial goals. She has nearly a decade of writing experience focused on budgeting, investment strategies, retirement and industry trends. Investors seeking a regular source of income are attracted to dividend-issuing companies. We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors.

While some stock dividends may require shareholders to hold their new shares for a set period of time, others come with cash options and can be converted into cash. Most companies pay a set dividend each quarter with a dividend yield that’s expressed as a percentage of the share price. For example, Union Pacific Corp. (UNP) pays a dividend of $3.88 per year per share. The $150 share price means that the dividend represents a 2.55% dividend yield—a metric that can be easily compared between companies. For example, if a company were to issue a 5% stock dividend, it would increase the number of shares by 5% (one share for every 20 owned).

Keep reading to learn more about how these cash and stock dividends are somewhat the same and how they differ. Stock dividends are the same kind of occurrence as cash dividends save that they are paid out in stocks rather than in cash. However, it is important to note that this has some important consequences for what happens as well as what interested individuals can expect. Cash dividends don’t impact the investor’s ownership percentage, which means that the investor doesn’t receive additional shares through the dividend. However, they can use the cash they receive to buy more shares in the business if they like.