Question

There are various types of dividends; however, the two most common dividends have to do with either a cash dividend or a stock dividend. With a cash dividend the shareholder receives cash, based on the number of shares that is owned. In a stock dividend the shareholder receives stock certificates, based on the number of shares owned.

From the perspective of the stockholder, which dividend would do you think they would prefer and from the perspective of the company, which dividend do you think they would prefer. Please fully explain your answer, giving reasons as to why.

Answer 1

When cash Dividend is declared and proposed for a year then the dividend is paid from the current year profit
and if the current year has no profit then it will be paid from the accumulated profit or Retained earnings.
In case of stock dividend the company has to provide the shareholders with shares based on there holding in the company.
So when the company declares a stock dividend it has to give shares for free, so there is no inflow of cash for the company.
Hence for a company it will always like to pay cash dividend even if the current year profit is not available.
One more issue due to which a company prefers cash dividend over stock is that when the company
declares stock dividend it has to give up control, To avoid this dilution of control company prefers cash dividend
For a stockholder who has invested in the company will always like to increase his shares in the company and more control
over the company. Hence he will always prefer to receive stock dividends. However if the company is not performing well
and the sahreholders are looking to exit in the near future then they will prefer cash dividend.