Most people think of a dividend as cash landing in their account. But some companies offer shareholders a different option: new shares instead of cash. This is called a scrip dividend. It is common enough among UK-listed companies that any income investor is likely to come across one, and it has some consequences that are easy to overlook.
What a scrip dividend is
A scrip dividend is a dividend paid in newly issued shares rather than cash. When a company offers a scrip alternative, shareholders can usually choose whether to take their dividend as cash or as new shares worth roughly the same amount. The number of shares is calculated using a reference price, often an average of the share price over a few days around the payment.
It differs from a dividend reinvestment plan, or DRIP. In a DRIP, the cash dividend is used to buy existing shares in the market. In a scrip, the company creates brand new shares.
Why companies offer it
For the company, a scrip dividend keeps cash inside the business. If many shareholders choose new shares, the company pays out less cash while still rewarding investors. That can be useful when a company wants to invest heavily, protect its balance sheet or maintain its dividend during a difficult period.
Why investors might choose it
Taking new shares lets investors grow their holding without paying dealing charges, which can help compounding over time. For long-term investors who would reinvest the cash anyway, a scrip can be a convenient way to do it.
The catch: dilution
Because scrip dividends create new shares, they increase the total number of shares in issue. That spreads future profits and dividends across more shares, an effect called dilution. Investors who take cash see their percentage ownership shrink slightly as others take new shares.
Some companies offset this by buying back shares in the market, which reduces the share count again. Investors often look at whether a company’s share count is rising over time, because a steadily increasing count can quietly erode the value of each share.
A simple example
Suppose you own 1,000 shares in a company paying a 20 pence dividend, worth £200 in cash. The company offers a scrip alternative at a reference price of £4 per share. Instead of £200, you could take 50 new shares. If you take the scrip, you now own 1,050 shares. If enough shareholders do the same, the company’s total share count rises, and each share’s claim on future profits falls a little.
Common mistakes
A common mistake is treating a scrip dividend as free extra shares. You receive shares instead of cash, not as well as. Another is ignoring dilution when a company relies heavily on scrip to fund its payout. A third is not checking the reference price, which can differ from the market price on the day the shares arrive. The tax treatment can also differ, so check your own situation.
The bottom line
A scrip dividend pays shareholders in new shares instead of cash. It helps companies conserve cash and can suit long-term investors, but it dilutes existing holders and is worth reading alongside the company’s buyback plans. For a related approach, read our guide to dividend reinvestment plans. To test your understanding of income investing, try the free Samuel & Co Trading Trader Assessment.
