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A dividend is a distribution of profits by a corporation to its shareholders. When a corporation...

A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a proportion of the profit as a dividend to
shareholders. Two important types of Dividends are Cash dividend and stock Dividend. There is a saying that some time, in short term Stock dividend favors the company but not in long term. Your detailed comments are needed.

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Answer #1

Cash dividend involves paying cash dividend as a percentage on par value of common stock. Stock dividend is dividend declared on outstanding commons shares. It is payable on number of common shares outstanding multiplied by stock dividend declared % multiplied by the market price of the share. Stock dividend rewards shareholders but is not favourable and sustainable to the company in the long run

  • It increases the capital base of the company. Hence all future dividend payouts will increase
  • It involves giving dividend at the market value of the share. Hence higher the market value of the share it will increase the total payout to the shareholders
  • It will reduce the Earnings per share available to shareholders since capital base will increase and existing net profit will be divided by more shares.
  • Lower Earnings per share will reduce the market price of the share
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