lemoneater (84.32)

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Harvesting a Dividend of a New Variety: Share Dividend

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May 20, 2011 – Comments (7) | RELATED TICKERS: GROW , PHG

Investing reminds me of gardening in so many ways. Both take time to grow. Both require careful weeding and lots of sunshine. But both can reward one in unexpected ways--like the year I had cucumber plants that just kept on producing like an energizer battery. (Someone told me that someone else was positively green with envy because my plants fruited a month before hers. That's the beauty of micro-climes and perfect weather conditions never duplicated since.)

Recently I was delighted to get a share dividend from PHG (Phillips Electronics). I was especially happy because normally I cannot automatically reinvest the cash dividends from that ADR. To get a whole share with no trading cost was a real bonus.

Since this has never happened to me before, I'm curious as to why a company gives out share dividends and what the tax ramifications are to shareholders.

So far from my portifolio, I've gotten annual dividends, semi-annual dividends, quarterly dividends, a special dividend (a really generous one-time payment), and now a share dividend. Is there any other variety of dividend I've missed?

Wishing you a good year for gardening:)

7 Comments – Post Your Own

#1) On May 20, 2011 at 11:46 AM, ikkyu2 (99.44) wrote:

A share dividend is essentially another name for a stock split. If you go on a DRIP, you are gaining shares that someone else has sold. If you get a share dividend, the new shares have been created out of thin air and added to the total share count of the company.

I think you have covered the major types of dividends.

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#2) On May 20, 2011 at 12:10 PM, MegaEurope (< 20) wrote:

You can also have in-kind distributions although they are extremely rare. Back in the 60s Warren Buffett had a story about taking delivery of tons of cocoa from a chocolate distributor in order to avoid extra taxes.

And of course there are also spinoffs involving common stock, preferreds, warrants, bonds, etc.

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#3) On May 20, 2011 at 1:41 PM, lemoneater (84.32) wrote:

@ #1 Thanks for the explanation, ikkyu2. If I understand correctly, creating new shares out of thin air would dilute the book value of the shares which are already in existence?

@ #2 I'd imagine that everyone in Buffett's company is tired of drinking cocoa by now. Neat story :). I heard about a college years ago which took tuition payment in cabbages from a student whose family owned a farm. You can have such a thing as too much cabbage!

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#4) On May 20, 2011 at 5:30 PM, rfaramir (97.35) wrote:

Lets hope Silver Wheaton (SLW) someday shifts to in-kind distributions. Tax-free silver would be so cool!

And, ikkyu2, is that really true about share dividends? Then that makes them non-events, just like stock splits are. But cash dividends (whether special or re-investable) are definitely not nothing, right? So they are not equivalent at all?

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#5) On June 01, 2011 at 12:23 AM, ikkyu2 (99.44) wrote:

Lemoneater, I believe that a share dividend simply dilutes the book values of the already-outstanding shares, unless the corporation issues "treasury stock." I am really not an expert in this area but I understand that corporations can retain shares of their own ownership. I think it's far more common that they simply issue a share dividend that dilutes already-existing shares.

rfaramir, as I understand it, share dividends are non-events, in comparison to cash dividends. A cash dividend means a piece of paper suddenly becomes MAGIC paper and drops gold coins into the pockets of the paper holder; a share dividend, by contrast, is more or less an accounting fiction.

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#6) On June 07, 2011 at 1:59 PM, lemoneater (84.32) wrote:

Very interesting, ikkyu2, I will moderate my joy over this share dividend and hope that my shares all appreciate together :)

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#7) On June 22, 2011 at 12:14 PM, lemoneater (84.32) wrote:

Wow, yesterday I was thinking about selling PHG which is one of my holdings that has been down for a while as compared to my cost basis. I wish I had gone with my feeling since it is down almost 10% today to make an unrealized loss of 37%. Evidently PHG needs to improves costs perhaps the share dividend was an early indicator of that fact.

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