# Forms of Dividend
A company can return value to shareholders in several forms.
| Form | Explanation |
|---|---|
| Cash Dividend | The most common form — paid as cash, cheque, warrant, demand draft, pay order, or via Electronic Clearing Service (ECS). It does not include dividends in kind. |
| Share Repurchase (Buyback) | The company buys back its own shares using corporate cash. Bought-back shares can be held as Treasury Shares (for future re-issue) or Cancelled Shares (retired from share capital). Assuming equal tax treatment, a buyback and a cash dividend have the same effect on shareholder wealth. |
| Stock Dividend (Bonus Shares) | Bonus shares issued in lieu of cash dividend, distributed proportionately to existing shareholders so ownership percentages are unchanged. Total net worth is unaffected because retained earnings are merely capitalized. Example: a 10% stock dividend on 100 shares gives 10 extra shares. |
## Stock Dividend — Advantages
### To Shareholders
- No tax on stock dividend — treated as a capital asset under the Income Tax Act, 1961, so no immediate tax.
- Increase in future cash dividends — if the per-share dividend rate is maintained, more shares mean a larger total cash dividend later.
- Improved liquidity — bonus shares break a high-priced share into more lower-priced shares, letting shareholders sell some for liquidity.
### To Company
- Cash conservation — cash is retained for profitable investment opportunities.
- Suitable for cash deficiency — ideal where there is a cash shortage or where lenders restrict cash dividend payments.
## Stock Dividend — Limitations
### To Shareholders
- No impact on wealth — only capitalizes past earnings; no new value created.
- No extra benefit — shareholders own the same proportion as before, just with more shares.
- Purely psychological — creates a positive impression of growth but no real financial gain.
### To Company
- Higher administrative costs — costlier to manage than cash dividends.
- Dilution risk from frequency — regular small stock dividends can dilute earnings over time.