What is a Scrip Dividend?

A scrip dividend is new shares of an issuer's stock that are issued to shareholders instead of a dividend. Scrip dividends may be used when issuers have too little cash available to issue a cash dividend, but still want to pay their shareholders in some manner. Scrip dividends may also be offered to shareholders as an alternative to a cash dividend, so that their dividend payments are automatically rolled into more shares.

Advantages of Scrip Dividends

The advantage for shareholders is that they do not have to pay any transaction fees, such as commissions, when acquiring new shares. This is also a modest way for the issuer of stock to save money by not paying cash dividends.

Disadvantages of Scrip Dividends

There are several disadvantages associated with the use of scrip dividends. They are as follows:

Impression on investors. A business that issues scrip dividends is leaving a strong impression with its shareholders that it does not have sufficient ready cash to pay them normal dividends. This also implies that the business may be facing a cash shortfall.
Impact on earnings per share. Once scrip dividends have been issued, there are more shares outstanding. This automatically reduces the firm’s reported earnings per share, since there are now more shares in the denominator of this calculation.
Impact on future dividends. Subsequent to a scrip dividend issuance, there are more shares outstanding. This can result in even more dividends being issued in the future, though this concern can be remedied by reducing the amount of the dividend paid per share.

Example of a Scrip Dividend

A shareholder of Mighty Dove Company holds 10,000 of its shares. The firm’s board of directors passes a resolution to grant shareholders a $5 per share scrip dividend. On the date of the resolution, the price of the company’s stock is $100. Based on this information, the shareholder will receive 500 shares.