What are Cash Dividend and Stock Dividend

a. Cash dividend

“The portion of earnings paid in cash to the investors in the proportion of their share is called cash dividend. Most of the firms pay dividend in cash to the investors in the proportion of the firms pay dividend in cash.” In the context of Nepal, Cash dividend is the most popular form of dividend so it is very popular in commercial banks and other firms. However it depends upon the earnings of the firm, management decision, Government policy, Nepal Rastra Bank policy and other various internal and external factors.

b. Stock Dividend

Stock dividend is only the paying stock equaling to the dividend that is to the dividend that is to be received by shareholders. “A stock dividend is paid in additional shares of stock instead of in cash and simply involves a book-keeping transfer from retained earnings to the capital stock account” (Weston and Copeland; 1986)

Firm pays stock dividend instead of cash dividend. It represents nothing more that a Book keeping shift within the shareholders ‘equity account on the firm’s balance sheet. It is simply the payment of additional shares of common stock to shareholders .It represent nothing more than a book keeping shift  within the shareholders equity  proportional ownership in the firm remains unchanged. Accounting authorities make a distinction between small-percentage stock dividends large percentage stock dividends and large percentage stock dividends.

i. Small-percentage stock dividends:-

If a stock dividend represents an increase of less than 10 percent of the previously outstanding common stock, it is referred to as a small percentage stock dividend entails transferring an amount from retained earnings to common stock and additional paid-in- capital.

ii. Large-percentage stock dividends:-

Large-percentage stock dividends (typically 20 percent or higher of previously outstanding common stock) must be accounted for differently while small-percentage stock dividends are not expected to materially reduce the market price per share of stock. In the case of large percentage stock dividends, therefore, conservatism argues for reclassifying an amount limited to the par value of additional shares rather than amount related to the pre-stock dividend market value of the stock.

The effects of stock dividend are as follows:

·         It doesn’t affect the shareholders proportional ownership 

·         Theoretically it is valueless to shareholders.