Definition
A scrip dividend (also called a stock dividend alternative) is a dividend where shareholders can choose to receive their dividend in cash or in additional shares of the company.
Mechanics
- The company declares a dividend (e.g., $0.50 per share).
- Shareholders are given a choice before a deadline: Cash or new shares.
- If no response is given, the default option (often cash) is applied.
Example
Company ABC Ltd. declares a scrip dividend of $0.50 per share. The reference share price is $10. You own 1,000 shares, making your dividend entitlement $500.
- Option A – Cash: Receive $500 directly.
- Option B – Shares: Receive $500 / $10 = 50 new shares.
Interview Q / Model Answer
Q: Why might a company offer a scrip dividend instead of a pure cash dividend?
A: It gives shareholders flexibility (income vs. compounding) and allows the company to retain cash while still rewarding shareholders.
Definition
Similar to a scrip dividend but applies to other corporate actions like mergers or special distributions. Shareholders must choose between receiving their entitlement in stock or cash.
Mechanics
- The company announces the corporate action and gives two or more options (e.g., all-cash, all-stock).
- Shareholders submit their elections by a deadline.
- If one option is oversubscribed, a proration may occur (receiving a mix of cash and stock).
- If no choice is made, the default is applied.
Example
In a merger, each share of Company Y can be exchanged for either $50 in cash or 2 shares of Company X (worth $25 each). You own 100 shares of Y.
- Option A – Cash: Receive 100 × $50 = $5,000.
- Option B – Stock: Receive 100 × 2 = 200 shares of X.
Interview Q / Model Answer
Q: What is proration in a stock/cash election?
A: Proration occurs if more shareholders choose one option than the company allocated. Each shareholder then receives a proportion of their chosen option and the remainder in the alternative.
| Feature | Scrip Dividend | Stock/Cash Election |
|---|---|---|
| Purpose | Dividend payout choice | Consideration choice in a corporate action (often M&A) |
| Event type | Dividend distribution | Merger, acquisition, or special payout |
| Options | Cash vs. additional shares | Cash vs. stock (sometimes a mix) |
| Default | Often cash | Often cash or a prorated mix |