Reading: Payout Basics

There are three common types of dividends:

• Cash dividends
• Stock dividends
• Property dividends

 In what follows, we briefly discuss the key characteristics of these dividends:

Cash dividends

Ford's dividend of $0.15 per share of common stock was a cash dividend: On December 1, 2017, each shareholder of record received a cash payment of that amount. As we will see in more detail later on, such cash payments have two main implications for shareholders:

• Taxes: A cash dividend constitutes a taxable income for the dividend recipient. 
• Partial liquidation of investment: A cash dividend reduces the amount of money that is invested in the company. In the case of Ford's, the amount of money that each shareholder had invested in the company dropped by $0.15 because of the dividend.

Stock dividends (Scrip dividend)

Instead of paying out cash, a firm can also distribute additional shares to its shareholders of record. This is the so-called stock dividend or scrip dividend. With a stock dividend, each shareholder of record receives additional shares of common stock.

The shareholder can then decide whether she wants to sell these additional shares in the market to einjoy a cash inflow equivalent to that of an ordinary cash dividend, or whether she wants to hold on to these shares to maintain her full investment in the company.

The main advantages of a stock dividend are:

• Flexibility: A stock dividend therefore gives shareholders greater flexibility, as they can choose whether or not to receive a cash payment. 
• Taxes: Stock dividends are not taxed until the shares are sold by investors. Stock dividends therefore have a tax advantage over cash dividends for investors who want to hold on to their shares.
• Liquidity: A stock dividend does not eat into the firm's cash liquidity. This can be an advantage for firms who have valuable investment opportunities lined up and therefore prefer to retain their cash.

Possible disadvantages of stock dividends could be:

• EPS dilution: A stock dividend increases the number of shares outstanding and therefore could reduce the firm's earnings per share (EPS). As we discuss here, EPS is an important performance metric for many market participants.
• Costs: Stock dividends are generally more costly to administer than cash dividends.
• Fractional shares: A stock dividend can lead to "Fractional Shares." Consider a company that announces a 5% stock dividend that gives existing shareholders 1 additional share for every 20 shares they already own. If a shareholder owns only 10 shares, her stock dividend will be 0.5 shares. While such fractional shares have value to the investors, they might be more difficult to sell than a full share.

Property dividends (Dividend in kind)

In principle, firms can distribute other assets as dividends as well, for example the shares of a subsidiary company or parts of the inventory that the firm holds. These are the so-called property dividends (or dividends in kind).

A mountain railway, for example, could distribute a day ticket to its shareholders en lieu of a cash payment of equivalent value. 

Clearly, propertiy dividends are less popular than cash or stock dividends, because it is often much harder to sell the distributed property in a liquid market.