Forms of dividend policy

The usual practice is to pay dividends in cash. Other option is to payment of the bonus shares or   stock dividend.

Cash Dividend: - Most companies pay dividends in cash. Sometimes cash dividend may be supplemented by a bonus issue. A company should have enough cash in its bank account when cash dividends are declared. If it does not have enough bank balance arrangement should be made to borrow funds. When the company follows a stable dividend policy, it should prepare a cash budget for the coming period to indicate the necessary funds which would be needed to meet the regular dividend payments of the company.

Example: $.5 for every share you hold.

Stock Dividend: - An issue of bonus share represents a distribution of share in addition to the cash dividend to existing shareholders. This has the effect of increasing the number of outstanding shears of the company. The shares are distributed proportionately. Thus, a shareholder retains his proportionately ownership of the company. The declaration of the bonus shares will increase the paid-up share capital and reduce the reserves and surplus of the company. The total net worth is not affected by the bonus issue in fact a bonus issue represents are capitalization of the owners equity portion, that the reserves and surplus merely an accounting transfer from reserves and surplus to paid- up capital.

             Example: 1 new stock for each 10 you hold.

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