What is a Scrip Dividend?
A scrip dividend is a form of distribution of dividends where dividend is paid out to shareholders in the form of shares in a company (that is paying out the dividend), in proportion to the shares already held. A company will issue a scrip dividend when there is a need to conserve cash for its investment needs, so that the shares are issued instead of paying out cash dividends. Scrip dividend shares are issued out of the unissued shares float that the issuing company has.
The price of shares issued as scrip dividend may be at par value, market price or at a discount on the market price. In some cases, when a company declares a dividend, it gives its shareholders the option to elect to receive their dividend either in cash or in form of shares of the company. Why would an investor consider a scrip dividend over a cash dividend? An investor/ shareholder stands to gain by electing to receive additional shares instead of receiving cash dividend in the following situations:
1. Where the shares are issued are par or at a discount to the market price, the shareholder could enjoy a capital gain by selling the shares at market price where it is higher than the issue price of the scrip dividend shares.
2. Because the scrip dividend issue shares qualify for future dividends and bonus issues by the company.
PS: Funguo Investments Limited issued a scrip dividend in respect of the financial year 2014/2015 where for every 100 shares held, and investor was allocated 1.85 additional shares. Shareholders who opted to take the scrip earned a capital gain of about KShs 10 per share.
Funguo Investment Limited’s shares are traded on an Over The Counter (‘OTC’) platform operated by
Funguo Investments Limited’s mandate is the creation of opportunities for value creation for its stakeholders.