Scrip Dividend

Updated on January 4, 2024
Article byWallstreetmojo Team
Edited byRaisa Ali
Reviewed byDheeraj Vaidya, CFA, FRM

Scrip Dividend Meaning

Scrip dividends, also known as liability dividends, are issued by the company to its shareholders in the form of a certificate instead of a cash dividend that provides a choice to its shareholders to get dividends at a later time, or they can take shares in place of dividends. Companies issue dividends when they have insufficient cash to pay as a dividend.

Scrip Dividend

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Scrip dividend is not taxable at the time of receipt. However, it will be taxable at the time of the sale of shares. It means capital gain tax will apply in scrip dividends in the case of dividend income tax.

Key Takeaways

  • Scrip dividends are also known as liability dividends. Instead of a cash dividend, the corporation gives certificates to its owners, allowing them to redeem them for shares or future dividends.
  • When a company lacks the cash to pay a dividend, it will issue dividends.
  • The Board of Directors proposes a scrip dividend.
  • It is not taxable at the time of receipt. Therefore, it will be taxable during the selling of shares. It means capital gain tax may apply in scrip dividends in dividend income tax.

Scrip Dividend Explained

A scrip dividend is issued by the company when the company wants to give a dividend. Still, it does not have the cash to pay dividends, or it wants to invest the available cash for the growth of the business, capital expenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more, or any other purpose. But at the same time, it gives a negative sign to the market about the company.

Investors do not want to invest in the company because they are not getting a cash dividend. They feel their money will get blocked as the company’s financial condition is not well or it does not have a cash crunch. Sometimes the company’s share price is also reduced.

It is one of the types of dividend in which dividend is paid in the form of shares rather than cash. In this type of dividend, the company issues promissory notesPromissory NotesA promissory note is defined as a debt instrument in which the issuer of the note promises to pay a specified amount to a party on a particular date.read more to the shareholders. They create notes payableNotes PayableNotes Payable is a promissory note that records the borrower's written promise to the lender for paying up a certain amount, with interest, by a specified date. read more on which interest will be included or not.

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How To Calculate & Issue?

A scrip dividend scheme is an important element when it comes to shareholders having something that they can encash or use at a later stage. As a result, it is important that organizations calculate the shares and issue dividends in the form of certificates with no error. A doubt in a shareholder’s mind will lead to distrust, harming an entity’s reputation.

Let us discuss the process of issuing this dividend in detail –

The formula used for scrip dividend calculation is mentioned below:

Number of Shares Held at Record Date * Cash Dividend per Share / Reference Price of Share

No far as scrip dividend tax is concerned, the shares will not be taxable at the time of receipt, like in cash dividendCash DividendCash dividend is that portion of profit which is declared by the board of directors to be paid as dividends to the shareholders of the company in return to their investments done in the company. Such a dividend payment liability is then discharged by paying cash or through bank transfer.read more but will be at the time of sale as capital gain tax, which is generally lower than the dividend income tax.

Examples

Let us consider the following examples to check what is scrip dividend and how it works:

Example 1 – Basic

Suppose a shareholder owns 1000 shares, and the company paid one share against 50 shares owned by a shareholder. Here, the investor will get 20 shares as a scrip dividend.

Example 2 – Advanced

If a shareholder holds 1000 shares and the dividend per share was $20 per share declared by the company and the reference price of the claim is $800 per share, then the shareholder will receive 25 shares under the scrip dividend scheme. How? Let us find out:

Solution:

Calculation of scrip dividend can be done as follows:

Scrip Dividend Example

No. of Shares Under Scrip Dividend = 1000 Shares* $20/$800 = $20,000/$800 = 25 Shares

Advantages

A scrip dividend is a tool that proves beneficial for both those who issue shares and also those who invest in them.

Some of the advantages are as follows:

Disadvantages

Undoubtedly, the scrip dividend scheme has many advantages, but there are demerits too that both organizations and shareholders need to know.

Some of the disadvantages are as follows:

Frequently Asked Questions (FAQs)

What is scrip dividend vs stock dividend?

In a scrip dividend, the shareholder can receive the dividend as cash or additional shares. In comparison, in a stock dividend, there is no option. Instead, the shareholder obtains an additional share.

Do scrip dividends go on tax return?

The dividend income obtained more than the dividend allowance is taxable. The dividend income received by individual shareholders who are liable to income tax at the basic rate of 20% must pay the tax at the basic dividend rate of 7.5%.

Are foreign scrip dividends taxable in UK?

Any cash payment is taxed as a cash dividend. A non-UK resident shareholder is subject to tax on any amount carried forward as a residual dividend entitlement under any law to which that person is outside the UK.

Which companies offer scrip dividends?

ACS, Banco Santander, Barclays, BP, ComputerShare, HSBC, Iberdrola, National Grid, Pennon Group, Rolls Royce, South Side Bank Share, and Royal Dutch Shell offer scrip dividends.

It has been a guide to Scrip Dividend & its Meaning. Here, we explain the concept with examples, advantages, disadvantages, and how to calculate and issue. You may also take a look at some of the valuable accounting articles here:-

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