We explain that what is the difference between bonus shares and stock dividends with table. Investing is important when it comes to achieving financial goals. In today’s world, making money and keeping it idle in your bank account is like missing an opportunity. What matters is working hard for the money you make and investing for good returns.
You can invest your hard-earned money in stocks. Stocks are one of many ways you can invest your hard-earned money. Companies issue shares to accumulate investors’ money for business expansion. When a company makes a surplus / profit, it issues a proportion of the profits to its shareholders in the form of bonus shares or dividends.
So the main difference between the two financial terms: bonus shares and stock dividend is that stock dividends are the payment that companies make to allocate wealth to their shareholders in the form of more shares, in addition to the ones they already own, and not in cash, while bonus shares are the new / additional shares, free of charge, issued to the shareholders of the company.
Comparison table between bonus shares and stock dividends (in table form)
Comparison parameter Bonus shares Stock dividend
|Sense||A bonus share is when a company decides to give additional shares to its existing shareholders.||The stock dividend is a portion of the company’s earnings that the company distributes to its shareholders in the form of cash.|
|Purpose||The purpose of issuing bonus shares is to increase the liquidity of a company’s shares, that is, how quickly shares can be bought and sold on the market without affecting their price.||The purpose of stock dividends is to distribute wealth to the shareholders of the company.|
|Calculation mode||The bonus shares are decided to distribute to the shareholders in the form of a ratio.||Dividends on shares are decided to be distributed to shareholders as a percentage.|
|Benefit||Bonus shares provide non-cash benefits.||The stock dividend is a monetary benefit.|
|Shareholder allocation||A company can issue bonus shares to its shareholders even when the company has incurred losses and this can be done with the reserves accumulated by the company in recent years.||Under the 2013 Companies Act, a company can pay dividends to shareholders only when the company makes 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 actions are known as ‘bonus actions’. If the shareholders of the company are qualified to receive bonus shares, it is credited to their Demat account.
Why do companies issue bonus shares?
Sometimes a business may have insufficient funds to pay dividends despite making a profit. In this scenario, the company issues bonus shares instead of dividends to its existing shareholders, in addition to its current shareholders of the company. Bonus shares are also known as earnings capitalization and are distributed to shareholders from the reserves or earnings of the company.
Advantages of bonus shares:
Bonus shares are issued by companies rather than paying a cash dividend. The various benefits that an investor can receive are as follows:
- It is beneficial to increase the faith of investors and shareholders in the long-term growth of the company to increase their investment in it.
- If in the mere future, the company decides to pay dividends in the form of cash, the investor will in turn receive a favorable amount for owning a large number of bonus shares.
- Bonus shares satisfy shareholders’ desire for dividends, as the company may not always be in a position to pay its shareholders in cash.
- Bonus shares increase the goodwill of the company 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 than receiving shares to meet the various objectives that an investor may have. However, selling bonus shares to build liquidity can reduce the investor’s stake in the business.
- Governing a plan that involves bonus shares is more expensive than paying cash dividends, as the shares can accumulate for years if the company continues to issue bonus shares.
- The issuance of bonus shares is a lengthy process and is often delayed due to the process of obtaining them by the central government through SEBI.
What is the stock dividend?
The stock dividend is the payment that is made in the form of shares instead of cash to issue wealth to the shareholders of the company. Stock dividends are also known as scrip dividends.
Advantages of stock dividends:
- Profitability: As an alternative source of income, you can invest in dividends to obtain stable income in the future. To earn income through stock dividends, you must first find good stocks that will generate profitable dividends, and once this is done, you can generate steady income for many years.
- Double Profits: If the stocks you’ve invested increase 40% over the next 4 years and you’ve received a 4% annual dividend yield from the same stocks, the combined earnings are more than just capital appreciation. Therefore, you get more profit when you do not preferentially invest in companies that do not pay dividends.
- Dividend Reinvestment: Dividends received from stocks can be used to invest in various secondary investment options such as bonds, gold, etc., which in return can help diversify your portfolio.
- Long-term investment: Stock dividends offer consistent, long-term income. This benefits most investors who prefer to hold stocks for a long time and helps to reap the long-term benefits of investing.
Disadvantages of the stock dividend:
- The market may declare stock dividends such as cash shortages or business uncertainties. For this reason, stock prices can fall in the market.
- Dividend Cut : A company may decide to cut dividends at any time in the future. Also, when the company cuts dividends, stock prices are set to fall. The board of directors changes the company’s dividend policy from time to time. This, in turn, will hurt dividend investors.
- Low-growth companies : Large, reputable companies offer large returns to their shareholders, while, on the other hand, many investors may be investing in low-growth companies that do not always offer high returns.
Main differences between bonus shares and stock dividends
- A bonus share is to reward the shares that the company awards to its existing shareholders. Stock dividends are the payments that the company makes, from its earnings, to its shareholders.
- One of the main purposes of bonus stocks is to increase retail participation as well as the liquidity of the stocks. The main purpose of stock dividends is to benefit the shareholders of the company by returning their wealth to them.
- The bonus shares are distributed to the shareholders of the company based on a proportion. The dividend in shares is distributed to the shareholders of the company based on a percentage that is finally decided by the company itself.
- Bonus shares are a non-cash benefit / reward for the shareholders of the company, in addition to its current shareholders. Stock dividends are considered a monetary benefit for its shareholders and are awarded based on the profit made by the company.
- Bonus shares can be issued to company shareholders even when the company has incurred losses and this payment can be made from the company’s reserves. Under the 2013 Companies Act, stock dividends are paid to shareholders only when the company makes sufficient profit at the end of the year.
Investments guarantee an individual’s security, growth, and income. Although each investment has its own unique set of benefits and risks, it highlights the importance behind how they help most people build wealth, finance retirement, and build savings and businesses to make the most of their earnings and earnings.
Many inexperienced investors may be unfamiliar with certain financial terms under the topic of dividend investing, such as stock dividends, or may even feel intimidated by them. Therefore, this article aims to clarify some definitions of basic terms, benefits and restrictions of dividends in stocks to help investors make the right decisions when it comes to investing in stocks and shares of a company and get the best returns. of such investments.
This article also informs us about how it is a good idea to buy shares of top companies, which have announced their bonus share issuance, by discussing how it is a positive signal to the market that the company is doing well in its long-term growth. . along with the advantages and disadvantages that a bonus share can bring to an investor.