When a company pays a cash dividend, the shareholders may need to pay income tax on that dividend. If a shareholder always wishes to reinvest the dividends, cash dividends have a few disadvantages:
- The shareholder always has to do work during dividend season to reinvest the dividends.
- The stock price is unlikely to be an exact multiple of the cash dividend, so the investor will have some cash left-over that is not reinvested.
- Dividends are tax-inefficient as mentioned above.
For such an investor, a stock dividend (as opposed to a cash dividend) may be a better choice because:
Dividends are "reinvested" automatically.
Whenever the investor needs cash, he/she can create a cash dividend simply by selling the extra shares given in the stock dividend. In effect, a stock dividend has an "optional cash dividend" within it.
I noticed that cash dividends are significantly more common than stock dividends. So my questions are:
Are stock dividends really better than cash dividends for investors who want to reinvest dividends?
Given the apparent efficiencies of stock dividends, why do companies continue to pay cash dividends and not stock dividends?