INVESTING EXPLAINED: What You Need to Know About Stock Dividends

In this series, we break down the jargon and explain a popular investing term or topic. These are stock dividends.

That sounds a bit like Dickens

We get that, but the word “scrip” actually has a much older history – dating back to the Middle Ages, when it was the name for a small bag used to carry money.

The meaning changed in the following centuries. A scrip variously became a token issued in lieu of wages (as part of exploitative employment practices), or a piece of paper denoting a right to acquire land or another asset. Under a stock dividend program, you can choose to purchase additional shares of a company’s shares at a set price instead of paying out in cash.

Which UK companies offer stock dividends?

Many big names, including BP, British Land, HSBC, National Grid, Pennon, Royal Mail, SSE and Shell, under a so-called drip dividend reinvestment plan.

What is the main advantage?

If you do not need the dividend income, the scrip option allows you to increase your shareholding in the company without incurring stamp duty on the transaction. The fee you pay is significantly lower than the fee a platform charges for buying stocks. The downside is that you don’t have the ability to determine the price at which you purchase the shares.

Part of the action: If you use the scrip option, you can increase your stake in the company without incurring stamp duty on the deal

Is it worth doing this?

A dividend reinvestment strategy can pay off – in the long term. The Barclays Equity Gilt study shows that reinvesting dividends would have turned £100 into £2.9m, albeit over a really long period of 121 years. This represents an average annual growth rate of 8.9 percent per year – which drops to 4.2 percent if dividends are not reinvested.

What is the advantage for a company?

It can reward its shareholders while conserving its cash, thereby strengthening its balance sheet. In the spring of 2020, the mall owner Hammerson only offered to pay out shares. The company has now paid out cash dividends again.

Why are we reading about stock dividends?

Mutual funds are companies that own shares in other companies in order to pay stock dividends. But there is excitement about trusts offering stock dividends at share prices higher than what their shares are trading at in the markets.

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Currently, the average difference or “discount” between a trust’s net asset value (NAV) and the price at which its shares trade is 14 percent. However, some trusts offer discounts of over 30 percent. Iain Scouller of broker Stifel says it is “not in shareholders’ interests to offer a scrip” if a trust’s shares are trading “significantly below net asset value”. Annabel Brodie-Smith of the Association of Investment Trust Companies says the trade body is reviewing the issues and reviewing its guidance on stock dividends.

How do the shareholders of these trusts react?

Most people realize that the stock dividend is a bad deal and opt to receive cash instead.

Do I still have to declare stock dividends on my tax return?

Stock dividends are taxed in the same way as cash dividends and should be disclosed on a self-assessment form.