Top 5 Types of Dividends Explained (Cash or Stock?)

Dividends are a great way to generate income from your investments, but there are different types of dividends that you should be aware of.

Depending on the excess cash, the board of directors will decide for the companies the amount of dividend payout to be paid to the common shareholders which will determine dividend yield.

The company will then officially announce a dividend declaration and the different forms of dividends paid to shareholders.

What Are The 5 Types Of Dividends?

A dividend is like getting a return on investment without selling your stocks. Dividends are a form of investment income that is paid out by a company to its shareholders on a periodic basis.

There are five common types of dividends: cash dividends, stock dividends, property dividends, scrip dividends, and liquidating dividends.

Depending on the company’s dividend policy, the current state of the company, and the financial health of the company, each company will issue different types of dividends.

Cash Dividend

A cash dividend is a payment of cash made by a company to its shareholders out of its profits. It can be paid quarterly but can be paid more or less often. The cash dividend is the most acceptable way for companies to share their profits with their shareholders and the dividend received are typically proportional to the number of shares that the shareholder owns.

For investors, getting a dividend in the form of cash is a good way to receive a return on their investment. When dividend stocks are bought, the investor is expecting to receive these regular payments.

Some investors call themselves dividend investors or income investors, where they find great dividend-paying companies and earn a passive income through dividend investing.

Stock Dividend

A stock dividend is a dividend that is paid to its shareholders in the form of stock rather than in cash. This type of dividend is often used by companies that are looking to reinvest their profits back into the company.

Stock dividends issued should not lead to a transaction for a greater proportion of the previously outstanding shares, otherwise, it will be considered a stock split.

Stock dividend is usually paid by companies that are doing well and are confident in utilizing the extra cash to grow the company further.

For investors, stock dividends can be a great way to increase their ownership stake in a company without having to put any additional money down, a good way to grow their investment over time.

Property Dividend

A property dividend is a type of dividend that is paid out in the form of property, rather than cash. This can be beneficial for investors because it allows them to receive a tangible asset that can appreciate in value over time (which is paid in property, such as land or buildings).

This can be beneficial for investors who are looking to reduce or defer their taxes, in addition to providing them with a way to diversify their holdings and reduce their reliance on stocks.

However, there are some risks associated with property dividends. Even though they have monetary value, property dividends can be more difficult to value than cash dividends.

Scrip Dividend

A scrip dividend is essentially a promissory note that may or may not include interest where the company promises to pay dividends to its shareholders at a later date.

It can also be a way for companies to save on cash flow since they don’t have to pay out the actual dividends in cash. Essentially allowing the company to better utilize cash for the company’s development.

Scrip dividends are also known to be paid as a form of compensation or payment to employees or entities when money was unavailable or in short supply.

Liquidating Dividend

A liquidating dividend is a type of dividend paid out by a company to its shareholders when the company liquidates, dissolves, or is going through a reorganization.

The dividend is paid out of the company’s assets and is usually proportionate to the shareholder’s ownership stake in the company. Liquidating dividends are not taxed as income but are instead treated as a return of capital.

Liquidating dividends are also known as “distressed dividends.

What Is Special Dividend In Stocks

A special dividend is a dividend that is paid out of a company’s reserves, rather than part of the regular company’s dividend payment cycle. It is a form of a non-monetary dividend that is paid to shareholders as a one-time, non-recurring event.

A special dividend may be issued when the company has surplus cash on hand. Often, this will be paid after a sale of an asset or a year of high profits.

The special dividend is generally much larger than the company’s typical dividend payment.

Special dividends can also be used to return capital to shareholders after a period of growth or expansion.

What Is The Most Common Type Of Dividend

Cash dividends are by far the most common form of dividend paid by companies. This dividend is paid out in cash (usually via direct deposit or check). A cash dividend is simply a distribution of cash to shareholders, typically paid out at different periods; monthly, quarterly, bi-annually, or annually.

This type of dividend is the most popular because it is the easiest to understand and predict.

For investors, dividends provide a way to receive regular income from their investment in a company without selling the stocks.

Passive income is often generated using this form of dividend and in fact, it is one of the easiest ways for any young investors to start earning passive income for retirement.

Should You Receive Your Dividend In The Form Of Cash Or Stock?

Cash is the most common and acceptable way of receiving dividends. It is because it gives you the control to either reinvest in the same stock, buy another stock, or simply cash out to buy other forms of investment.

However, if you’re planning on reinvesting your dividends back into the stock, then receiving them in the form of stock may be a better choice.

Some companies offer Dividend Reinvestment Plans (DRIPs), which allow shareholders to automatically reinvest a stock’s cash dividends for additional shares in the stock regardless of the stock price.

While both options have their benefits, it is ultimately up to the investor to decide which option is best for them.

Regardless, dividend investing is especially great for young investors who want to build a passive income since this group of investors will benefit from the years of dividends given out by the company.

Each investor have different risk appetite and investing style.

Discover your own investing style and learn the different tips and tricks in it.

The only way to know which investing style suits you more, is to read more.

Warren Buffett read approx 500 pages a day.

Knowledge of investment can be learned from books or articles like this one. Reading can only make you wiser and smarter so that you too may be able to make the right decision in your investment.

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Antony C.

Founder & Financial Writer at Income Buddies | Website | Posts by Author

Antony C. is a dividend investor with over 15+ years of investing experience. He’s also the book author of “Start Small, Dream Big“, certified PMP® holder and founder of IncomeBuddies.com (IB). At IB, he share his personal journey and expertise on growing passive income through dividend investing and building online business. Antony has been featured in global news outlet including Yahoo Finance, Nasdaq and Non Fiction Author Association (NFAA).