What is a Scrip Dividend?

Should you take extra shares instead of cash when a company pays a dividend? 

That choice often comes down to understanding script dividends. A scrip dividend lets you receive new shares rather than cash, helping companies preserve cash while giving investors a larger ownership stake. For investors, this can be an easy way to grow holdings without fees or extra effort. For companies, it frees up cash for operations or growth, especially in uncertain markets. 

This guide explains how scrip dividends work, why companies offer them, and when choosing shares over cash can make sense for your portfolio.

What you’ll learn

• Understanding Scrip Dividend
• How Scrip Dividends Work
• Why Offer Scrip Dividends
• Advantages
• Drawbacks and Considerations
• Scrip Dividends vs. Cash Dividends
• Tax Treatment of Scrip Dividends
• Ideal Scenarios
• Conclusion
• FAQs

Understanding What a Scrip Dividend Is

A scrip dividend is a type of dividend that provides investors with additional shares of the company’s stock instead of a cash payment. The value of the new shares issued is approximately equal to that of the cash dividend. Shareholders receive new shares of stock based on a predetermined conversion ratio or reference share price, making the process simple and predictable for them.

For companies, the ability to pay dividends using shares allows them to reward their investors while maintaining control of their cash. This is especially important for companies during periods of economic uncertainty or for companies that operate in industries such as capital-intensive businesses that require a lot of cash to operate.

From an investor’s standpoint, receiving a scrip dividend would be a way for an investor to automatically reinvest their dividend back into the company, allowing them to increase their ownership in the company gradually over time, thus potentially increasing their long-term returns on investment. Investors who believe in the company and its future growth prospects may find that the compounding effect of receiving additional new shares via a scrip dividend is beneficial and subsequently may expect to receive a greater future dividend income from that company. Often, when companies provide a choice between receiving new shares of stock or a cash dividend, investors who require immediate access to cash can still elect to receive the cash dividend option.

How Scrip Dividends Work in Practice

In issuing a scrip dividend, the company makes an announcement similar to that of a cash dividend, in which the company states important details such as the date of the record, date of payment and ratio of a scrip, to specify how many new shares will be received by the shareholders or the equivalent value in stock to be received. In addition, it may also state whether shareholders are allowed to choose between the shares and cash, as determined by local rules and corporate policy.

After that, the eligible shareholders must confirm their choice within the specified time frame. In some cases, companies will automatically issue shares, while in other cases, investors have the ability to formally choose to opt into or out of receiving a scrip. For those who choose to receive shares, the company will calculate how many will be allocated to them using either the current market price or the fixed reference price. The company will generally round down all shares to whole units, paying cash for the remaining value.

When the distribution is completed, the company will create the new shares, which will slightly increase the total number of shares; thus, result in minimal dilution. In exchange, the company retains cash, thereby continuing to maintain its commitment to pay dividends. Investors receive their new shares through direct deposit into their brokerage accounts on the payment date. This makes scrip dividends an efficient method to reinvest income and build ownership without requiring a separate transaction.

Reasons Companies Offer Scrip Dividends

Companies use scrip dividends to offer shareholders a way to receive dividends while keeping financial flexibility intact. One example is conserving cash reserves during periods of economic uncertainty, such as when high-profile political statements about the economy are closely scrutinized and fact-checked, adding to market uncertainty, which can pressure profits or liquidity. Instead of distributing cash, companies issue shares, allowing them to preserve reserves for operations, debt repayment, and other short-term obligations while continuing to reward shareholders.

Companies may also choose to reinvest retained cash back into the business rather than paying dividends to shareholders. Retained cash enables firms to pursue growth through research, expansion, or acquisitions, particularly in industries requiring ongoing investment to remain competitive. By offering scrip dividends, companies can avoid negative market reactions that often follow dividend cuts or suspensions, such as those seen when regulatory charges force firms to reduce payouts, which may otherwise signal financial distress to investors.

Scrip dividends also promote long-term ownership by allowing investors to automatically increase their holdings at no transaction cost. Investors confident in the company’s prospects may value the opportunity to build ownership over time, strengthening loyalty and contributing to a more stable shareholder base, much like other shareholder-focused incentives used in some markets to encourage engagement and long-term participation. Overall, scrip dividends offer a balanced way for companies to protect cash reserves while still delivering value when cash distributions are less feasible.

Advantages for Investors

For many long-term investors, there are several benefits to scrip dividends. One of the most significant benefits of scrip dividends is that shareholders automatically reinvest their dividends. Rather than receiving cash and deciding if/when to reinvest those dividends, shareholders receive additional shares immediately. Therefore, each new share, in turn, has the potential to produce future dividends, compounding your returns over time with little or no additional effort required.

Another benefit of scrip dividends is that they allow you to increase your ownership without incurring brokerage or transaction fees. Scrip dividends provide a method of reinvesting your dividends without cost, allowing you to increase your holdings without commissions and also to avoid the timing risks associated with manually purchasing shares. Therefore, for long-term holders of dividend paying stocks, scrip dividend plans provide a very efficient way to accumulate wealth through compounding.

Scrip dividends also promote disciplined investing. By receiving additional shares rather than cash on a consistent basis, investors benefit from continual long-term market growth and increasing dividend payments. In some cases, offering scrip dividends may be indicative of management’s belief in the business’s future prospects. For investors focused on increasing income, consistency, and compounding, scrip dividends provide an easy way to increase returns without the need for constant portfolio adjustments.

Drawbacks and Considerations

Scrip dividends offer a way for investors to receive dividends without having to sell shares to raise cash. However, when companies issue new shares for scrip dividends, they increase the total number of shares outstanding, diluting existing ownership, a risk that has drawn scrutiny in situations where shareholders have pushed back against proposed share issuances. If a company continues issuing scrip dividends without corresponding profit growth, existing shareholders’ equity can decline over time.

Due to the nature of scrip dividends, share price volatility can have an impact on the number of share(s) received by investors. For instance, when investors receive scrip dividends, the number of shares issued to them will be based on the current market price of the stock, which in turn affects the overall equity yield rate. Therefore, if a stock’s price drops after the issuance of the scrip dividend, the value of the new share(s) will be worth less than what was originally expected.

Another important factor is tax implications. In many countries, investors are subject to income taxes on scrip dividends based on their market value, although they do not receive cash for scrip dividends. When investors need to pay taxes out of their cash flow, it can cause cash flow problems.

Therefore, assessing the financial situation of a company that offers scrip dividends is important. The reason for offering them will dictate if they are strategic or simply meant to alleviate cash flow issues, which could lead to larger financial problems in the future, particularly when evaluated alongside insights from expert share selection platforms.

Comparing Scrip Dividends to Cash Dividends

Shareholders may receive a dividend through a scrip dividend or a cash dividend. Scrip dividends pay out in additional shares and automatically reinvest the dividends received, whereas cash dividends give investors immediate access to their money. Cash dividends are often preferred by investors who rely on dividend payments for regular income, particularly those focused on income investing, while scrip dividends provide additional shares to shareholders focused on long-term growth rather than short-term cash flow.

Flexibility is one of the primary differences between the two methods. Investors who receive cash dividends have the ability to reinvest their dividend payments as they see fit and also have the option of diversifying into other assets. Conversely, when shareholders receive scrip dividends, they are essentially reinvesting in the same company, which could benefit long-term investors but may restrict broader portfolio control.

Liquidity is also important in determining which method is superior. Cash dividends provide immediate access to funds, while scrip dividends increase the number of shares owned, creating additional equity that may need to be sold to generate cash. Nevertheless, many publicly traded companies offer the choice between cash or shares, a distinction often discussed in popular investing publications, giving investors added flexibility. Ultimately, the better option depends on an investor’s goals—cash dividends support predictable income, while scrip dividends encourage compounding and long-term capital growth.

Tax Treatment of Scrip Dividends

Tax treatment of scrip dividends will vary by country, but, in many instances, scrip dividends are treated similarly to cash dividends for tax purposes. Investors receive shares instead of cash and, usually, what is considered the market value of those shares at the time of the transaction will also be considered taxable income. Thus, an investor may have a tax liability and not have received cash to pay that liability because scrip dividends still provide an economic benefit to the investor.

In the United States, the determination of whether scrip dividends are taxable depends on whether shareholders were offered a cash or stock option. If a shareholder only receives shares and no cash alternative is available, the shares are generally not taxed until they are sold. However, if investors can choose between cash or stock, the fair market value of the shares is typically treated as taxable income at the time of distribution. Similar rules apply in other countries, including Canada and the UK, where changes such as recent increases in dividend and savings tax rates can materially affect after-tax returns, although the specific rates and regulations differ by jurisdiction.

As such, there is no standard conclusion that receiving stock in place of cash will defer any taxable event. It is wise for investors to familiarize themselves with their local regulations and to understand how the tax treatment of dividend options will affect them. To get the best clarity and tax efficiency, investors who are considering their scrip dividend options should seek the advice of a qualified tax professional.

Ideal Scenarios for Scrip Dividends 

Scrip dividends can benefit specific investors in certain market situations. Firms may offer scrip dividends during periods of economic or market turmoil as a way to preserve cash while continuing to pay dividends, especially when heightened market volatility reflects a broader buildup of global risk. This also gives investors with a long-term view an opportunity to accumulate additional shares at lower prices, increasing ownership during volatile periods and positioning themselves for future price appreciation.

Scrip dividends align with dividend growth investors’ philosophy of reinvesting dividends. Investors use scrip dividends as automatic reinvestment and receive additional shares automatically as opposed to reinvesting their cash manually. As a result, over time, this can create a substantial increase in share count and dividend income and therefore create a compounding effect with little effort.

Scrip dividends are ideally suited for investors who are not reliant on immediate cash flow and are focused on building long-term wealth. Younger investors or those in the accumulation phase may see the greatest benefit as compounding becomes more impactful as time progresses. Scrip dividends should be issued by financially sound companies with strong balance sheets and a demonstrated commitment to the shareholder. When a company meets these criteria, issuing scrip dividends becomes an efficient means for the investor to grow both their equity position and future income without making any additional cash investment.

Conclusion

Scrip dividends are an alternative way to distribute shares to investors without paying cash. An investor can receive additional shares at no cost. In addition, companies can use scrip dividends to retain cash within their business during times of uncertainty or in situations requiring a larger capital investment than what would typically be needed. When managed appropriately, both shareholders and corporations benefit from scrip dividends.

Investors value scrip dividends because of their long-term compounding potential. Ownership grows by receiving shares instead of cash. As a result, investors can expect their total dividend income to increase over time, which makes a scrip dividend strategy ideal for those interested in dividend growth and reinvestment.

Although scrip dividends have some advantages, investors must weigh potential drawbacks, such as dilution of shares or tax implications, when determining whether to use scrip dividends. It is necessary for investors to understand a corporation’s financial strength, anticipated growth, and tax regulations that apply locally before accepting a scrip dividend. A well-thought-out strategy, when applied to scrip dividends, can help create a strong, sustained income portfolio over time.

About the author

Tim Fries

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Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.