As with shareholders, share plan participants who hold shares in a share plan may be entitled to receive dividends from the shares they own. Dividends are a way for companies to distribute a portion of their profits to shareholders. Dividend payments are made on a regular basis for an amount that directly reflects the profits a company has experienced over a period.
The most common type of dividend is the cash dividend, however there are several other dividend types. Understanding the differences in types of dividends and the benefits of each help set up the overall dividend strategy of your company creating alignment with your goals and objectives. Keep reading for insight into the types of share plan dividends and what each can do for your participants and your company.
Cash Dividends
Cash dividends are payments made by a company to its shareholders in the form of cash. The amount a participant receives is usually based on the number of shares they own, and the dividend rate set by the company.
The primary benefit of cash dividends is the immediate income they provide, which can be useful for covering expenses or reinvesting in other opportunities.
Dividend Reinvestment Plans (DRIPs)
Dividend Reinvestment Plans (DRIPs) allow shareholders to reinvest their cash dividends into additional shares of the company's stock, rather than receiving the dividends in cash. This can be an effective way to grow the investment over time.
The primary benefit of DRIPs is compounding growth. By reinvesting dividends, participants can take advantage of compounding growth, as their investment grows with each dividend payment.
Scrip Dividends
Scrip dividends are a type of dividend payment where a company offers its shareholders the option to receive additional shares of the company's stock instead of a cash payout. This can be an attractive option for both the company and the shareholders.
For the company, the primary benefit of issuing scrip dividends is the preservation of cash, which can be used for other investments or operational needs.
Asset Dividends
Asset dividends are payments made to shareholders in the form of other assets such as investment securities like other company's stock.
The primary benefit of asset dividends is diversification. By issuing asset dividends, the company conserves cash flow and builds strategic investments. For participants, asset dividends diversify their portfolios and offer the potential for long-term investments with higher returns.
Are DRIPs, scrip dividends, and asset dividends more complex to implement?
Cash dividends is relatively straightforward, and the most common way companies distribute profits to shareholders. DRIPs, scrip dividends, and asset dividends are special practices that can offer unique and advantageous benefits supporting company goals and objectives.
However, in comparison to cash dividends, they generally require additional considerations and processes to implement. These considerations and processes include, but are not limited to:
DRIPs
- Robust System:
Unlike cash dividend, DRIPs require complicated calculations due to their compounding nature. Achieving compounding growth requires a robust system for accurate calculation to maximize the benefits of each participant's dividend entitlement via reinvestment. - Experienced Service Team:
Besides the system, a team that is capable of operating the system and completing the entire process within the reasonable timeline, including fund calculation, stock purchase, share allocation, is essential to ensure the accuracy of compounded stock.
Scrip Dividends
- Election Platform:
A user-friendly platform is essential to enable employees to easily select between receiving dividends in cash or stock, as well as providing effective employee communications. - Allocation:
After consolidating employee choices, accurate allocation of corresponding stocks or cash must be executed based on predefined rules. This involves seamless integration of selection results with cash and share distribution.
Asset Dividends
- Multiple Stocks:
It's essential to enable employees to view a variety of stock holdings in their online accounts and conveniently manage different stock transactions. - Future Rights Support:
A more challenging future scenario may arise that involves supporting various shareholder rights associated with other company's stocks. This includes dividend distribution, voting rights, and participation in corporate events (e.g., stock splits or consolidations).
No matter the dividend structure, Computershare offers experience and expertise to support your dividend events for you and your plan participants and guide companies through each critical step of the process.
Ready to learn more? Contact us today.
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