There are various types of dividends; however, the two most common dividends hav

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.

Explanation / Answer

From the perspective of the stockholder, they will prefer cash dividend instead of stock dividend. This can be explained based on the 'bird in the hand' theory. The stockholder would prefer something certain now, rather than something bigger in value in the future as future is full with uncertainty. Also, with cash in hand, the stockholder can have flexibility to deal with the cash (invest in other company, stock, property). From the perspective of the company, they will prefer to give stock dividend. Cash is a precious element of the working capital cycle. If cash dividend is give out to the stockholder, the company may have to find extra cash (perhaps through borrowing) to maintain the working capital cycle of the company, which is vital for the survival of the company. Also, giving out stock dividend means that the company will not suffer any cash outflow from the company account. This is surely preferred from the company's perspective. Hope this helps!

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