Investment is essential when it comes to accomplishing one’s financial goals. In today’s world, earning and keeping money idle in your bank account is equivalent to a lost opportunity.
What matters is working hard for the money you earn and investing in getting good returns.
One can invest their hard-earned money in shares. Shares are one of the many ways one can invest hard-earned money. Companies issue shares to accumulate money from investors for the expansion of business.
When a company earns a surplus/profit, it issues a proportion of the profit to its shareholders, either in the form of bonus shares or dividends.
- Bonus shares are additional shares issued to existing shareholders at no cost as a reward or to maintain investor interest. At the same time, a stock dividend is a distribution of shares to shareholders in proportion to their existing shareholdings as an alternative to a cash dividend.
- Both bonus shares and stock dividends increase existing shareholders’ shares. Still, bonus shares are generally issued to retain investor interest or capitalize on retained earnings, while stock dividends are a way to distribute profits to shareholders without using cash.
- Both bonus shares and stock dividends can impact a company’s share price, capital, and earnings per share. Still, they serve different purposes in rewarding shareholders and managing a company’s financial resources.
Bonus Shares vs. Stock Dividends
Bonus shares, also known as scrip dividends, are additional shares given to existing shareholders in proportion to their current holdings. Stock dividends, also known as stock splits or capitalization issues, are similar to bonus shares in that they are additional shares distributed to shareholders.
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|Parameter of Comparison||Bonus Shares||Stock Dividend|
|Meaning||A bonus share is when a company gives additional shares to its existing shareholders.||Stock dividend is a part of company profit that the company distributes to its shareholders in cash.|
|Purpose||The purpose of the issue of bonus shares is to increase the liquidity of the shares of a company, that is, how quickly shares can be bought and sold in the market without affecting their price.||The purpose of stock dividends is to return wealth to the company’s shareholders.|
|Mode of calculation||Bonus shares are decided to be distributed to the shareholders in the form of a ratio.||Stock dividends are decided to be distributed to the shareholders as a percentage.|
|Benefit||Bonus shares provide non-monetary benefits.||Stock dividend is a monetary benefit.|
|Allocation to shareholders||A company can issue bonus shares to its shareholders even when the company has incurred losses, which can be done from the reserves accumulated by the company in the past years.||As per the companies act 2013, a company can pay dividends to the shareholders only when the company earns substantial profits at the end of the financial year.|
What are Bonus Shares?
Sometimes, the company issues additional shares to its current shareholders based on the number of shares each shareholder owns. These shares are known as ‘bonus shares.’
If the company’s shareholders qualify for bonus shares, they are credited to their Demat account.
Why do companies issue bonus shares?
Sometimes a company may have insufficient funds to pay dividends despite earning profits. In this scenario, the company issues bonus shares instead of dividends to its existing shareholders and their existing holders.
Bonus shares are also known as capitalization of profits and are distributed to the shareholders from either the reserves or earnings of the company.
Advantages of bonus shares:
Companies issue bonus shares instead of paying a cash dividend. The various benefits an investor can receive are as follows:
- It is beneficial in enhancing the faith of the investors and shareholders in the company’s long-term growth to increase their investment in the same.
- If, in the future, the company decides on the payment of the dividends in the form of cash, the investor will, in turn, receive a favorable amount for holding many bonus shares.
- Bonus shares satisfy the dividend desire of the shareholders since the company may not always be able to pay its shareholders cash.
- Bonus shares increase the company’s goodwill in the market by creating a good image of the company and its shares.
Disadvantages of bonus shares:
- Some investors may be more interested in liquidity rather than receiving shares to fulfill the various objectives an investor may have. However, selling bonus shares to generate liquidity may reduce the investor’s stake in the company.
- Governing a plan involving bonus shares is more costly than paying dividends by cash since shares can accumulate for years if the company keeps issuing bonus shares.
- The issue of bonus shares is a lengthy process and is often delayed due to the process of obtainment by the central government using SEBI.
What is Stock Dividend?
Stock dividend is the payment made in the form of shares instead of cash to issue wealth to the company’s shareholders. Stock dividends are also known as scrip dividends.
Advantages of Stock dividends:
- Yielding Income: As an alternative source of income, one can invest in dividends to earn a steady income. For earning income through stock dividends, first and foremost, you need to find good stocks yielding profitable dividends, and once this is done, you can yield steady income for many years to come.
- Double profits: If the stock you have invested rises by 40% in the next 4 years, and you have received a dividend yield of 4% per year from the same stock, the profits combined are more than just the capital appreciation. Hence, you gain more profits when you do not preferably invest in companies that give no dividends.
- Dividend Re-investment: Dividends received from stocks can be used to invest in secondary investment options like bonds, gold, etc., which can help diversify your portfolio.
- Longstanding investment: Stock dividends offer a steady and long-term income. This benefits most investors who favor holding the stocks for a long time and helps reap the benefits of long-term investing.
Disadvantages of Stock dividend:
- The market may declare stock dividends as a cash shortage or uncertainties in the company. For this reason, the prices of the stocks may fall in the market.
- Dividend cut: A company may decide to cut dividends at any time. Moreover, when the company cuts the dividends, the share prices intend to fall. The board of directors changes the company’s dividend policy from time to time. This, in turn, will harm the dividend investors.
- Low-growth companies: Big reputed companies offer a significant profit to their shareholders. On the other hand, many investors may be investing in low-growth companies that may not always offer high returns.
Main Differences Between Bonus Shares and Stock Dividends
- A bonus share is a reward the company gives its existing shareholders. Stock dividends are the payments given by the company from their profits to their shareholders.
- One of the significant purposes of bonus shares is to increase retail participation and the liquidity of the shares. The primary purpose of stock dividends is to benefit the company’s shareholders by returning their wealth to them.
- Bonus shares are distributed to the company’s shareholders based on a ratio. The stock dividend is distributed to the company’s shareholders based on a percentage the company eventually decides.
- Bonus shares are a non-monetary benefit/reward to the company’s shareholders in addition to their existing holders of shares. Stock dividends are considered a monetary benefit to its shareholders, given per profit the company earns.
- Bonus shares can be issued to the shareholders of the company even when the company has incurred losses, and this payment can be made from the company’s reserves. As per the Companies Act 2013, stock dividends are paid to the shareholders only when the company earns enough profit at the end of the year.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.