How Does A Scrip Dividend Work And What Is A Scrip Issue?A way for a company to save money but still pay a dividend is called a scrip dividend. This takes the form of a listed company creating more shares in the firm and giving them for free to existing shareholders. This is called a scrip issue. It is a form of secondary issue and could also be well described as a way for a company to capitalise financial reserves. Generally, a firm will pay one new share for a certain and fixed number of existing shares already owned. For example, this may take the form of one new share for every 20 held. This would be called a 1 for 20 scrip dividend. Therefore, if an investor owned 500 shares in a firm, and a 1 for 20 issue is paid, the investor would be entitled to 25 new shares. These are in addition to the current holding.
Ordinary shares held x Original share price divided by Total number of new shares held It is worth noting that should an investor sell the newly issued shares, the proportionate holding in the company is reduced. Therefore, if we follow our example still further and the current price per share is 10.50... 500 x 10.50 divided by 525 = 10.00 (Ex-scrip price) The investor could sell the new scrip shares and receive: 10.00 x 25 = 250.00 This is a rather ingenious way of offering a reward to shareholders without the need to actually release money. For some investors, it will offer a tax efficient way of receiving benefits from a holding.
However, since in the UK the majority of investors do not pay capital gains taxes, this is a more tax efficient route of releasing funds to investors. If you click here you can read my only ever submission to Wikipedia, where a scrip issue is explained. For more information about dividends:
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