What is a cash dividend?
A cash dividend is a payout of a company's profits or earnings to shareholder, in the form of cash. For example, SingTel pays dividends twice a year, typically in January and August. Both payment are in cash. In 2015, SingTel paid out $0.068 per share in January and $0.107 per share in August.
What is a scrip dividend?
A scrip dividend is a payout in the form of new company shares, sometimes also known as stock dividend. Typically, when a company offers a scrip dividend, they would also offer you an alternative option to take the dividend in cash. For example, OCBC recently offered a scrip dividend worth $0.18 per share in August 2015.
Should I take cash or scrip dividend?
Back to the above example, OCBC announced that the price at which each new share for scrip dividend will be issued is at S$8.71. The issue price is usually based on a formula, in this case, a 10% discount to the average of the volume-weighted average prices of the Shares for each of the market days between 12 August 2015 and 14 August 2015 (both dates inclusive), which was S$9.67. Say you have 1,000 shares of OCBC. If you opt to receive the dividends in cash, then you would receive $0.18 x 1,000 shares = $180 cash. If you opt to receive the dividends in scrip, then you would get $180/$8.71 = 20 shares. Usually, the company would also announce that "fractional entitlements will be rounded down to the nearest whole number". This means that if your calculation turned out to be 20.67, you would receive 20 shares. At the point when you receive documents on your OCBC dividend, say, the price of OCBC dropped to $8.60. It would cost you more to subscribe to the shares, ie. it is cheaper to buy from the open market at $8.60 rather than take up the scrip dividends at $8.71. However, if the price of OCBC remained high, say $9.30, then it would be beneficial to take up the scrip dividends, ie you get to buy the new shares at $8.71 while the open market is trading at $9.30. Upfront, you would make a paper profit of $0.59 per share, valuing your 20 shares at $186.
Hence, the next time you have a choice between scrip or cash dividends, compare its issue price against the price on the stock market, it will greatly help you to make the decision.
If you wish to know more on how to analyze dividends, read the article: Dividends: Checking The Stability Of A Stock's Payout
