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Some stocks like GlaxoSmithKline, HSBC, Tesco, Unilever all offer dividends every quarterly/yearly, with the option of scrip dividend (opting to use the dividend to purchase shares).

Why would companies keep diluting their share? I can possibly understand if it is a one-off basis, but it seems every quarterly/yearly dividend those companies issue, they give you a scrip dividend option.

Why would they want to dilute their shares/increase their share holdings? Is this something like the reverse of buybacks? And if I take the cash, the share price of my shares will get less.

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There are quite a few reasons that a company may choose to pay dividends rather than hold cash [increasing the share value].

  1. The Company is at peak growth, the cash kept will not enable the company to redeploy the funds to match the growth. For example if a company is getting a return [profit of say 10%], there is additional cash of say 1 Million. If the additional cash does not generate the same return, its reducing the value to company and shareholder.
  2. Too much cash on the books means share price would be high, at some point this would become a psychological barrier and people may feel it's expensive.
  3. A predictable dividend paying company attracts investors who are more passive and want to invest in this share and keep getting dividends to meet expenses. Having a fair share of such investors curbs volatility.
  4. Avoid public criticism, these days it doesn't take long for company to lose its capital [especially in tech industry] and waste the reserves.

Of couse there are equally other set of reasons why a company may not want to give dividends and hold on to cash.

Related question here Please explain the relationship between dividend amount, stock price, and option value?

  • @ChrisW.Rea Yes. Looks like even the spell checker is not helping me these days with spellings :( – Dheer Mar 14 '14 at 12:21

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