Investing is important, especially when it is regarding the accomplishments of your financial goals. At the same time, earning and sitting on it in a bank is the same as losing an opportunity for growth. What matters is working really hard for the money you make and investing that into getting good returns out of those.
One of the numerous ways to invest your money is by investing in shares. Companies issue Shares and the shares can be bought on their own or as part of a broader investment portfolio. When stocks do well, investors receive bonuses from them (called “bonus shares” – this is what happens when “the companies earn a profit/surplus”) either in additional shares of or through dividends paid out to all shareholders across the board (like what happened when Apple started paying these dividends last year).
Stock Dividend Vs. Bonus Shares
The contrast between a stock dividend and bonus shares is that the latter are new/additional, free-of-cost shares issued to the shareholders of a company. Whereas stock dividends are payments made by companies for allocating their wealth in additional shares, on top of those they already own.
Comparison Table Between Stock Dividend and Bonus Shares
| Parameter of Comparison | The Bonus Shares | The Stock Dividend |
| Meaning | Bonus shares are a form of stock reward, typically given at the discretion of the company’s board. They’re often rewarded as an incentive for employees and/or shareholders who have helped to contribute to achieving sales targets or other milestones. | The dividend is the reward for holding on to stocks. It’s money that a company shares with its investors in cash, instead of reinvesting the income into new products and services. |
| Purposes | The motive of bonus shares is making it easier for people to buy and sell the stock order without influencing its price. | A stock dividend is a profit distribution to shareholders. To help protect the value of their shares, companies distribute dividends in cash rather than reinvest the profits back into their company. |
| Mode of calculation | In the case of a bonus share distribution, shareholders are given shares proportionate to their ownership in the company. | The decision to distribute stocks as dividends is based on a percentage. |
| Benefits | The Bonus shares are a way to offer non-monetary benefits. | A stock dividend is a total monetary benefit in the form of stocks. |
| Allocation to shareholders | Shareholders can request that the company issue more shares to them when companies have suffered losses, even if there is no money saved within its reserves. | The Companies Act 2013 states that companies can only pay dividends to their shareholders when they have made substantial profits. |
What are Bonus Shares?
Sometimes, companies issue shares to their current shareholders depending on how many shares they own. These additional shares are called ‘bonus’ or ‘granted’ or ‘Demat’ equity shares’ and are credited to their respective Demat account if qualified for bonus share.
Why are bonus shares issued by companies? In a scenario where the company generates profits but doesn’t have sufficient funds to pay the dividends, it issues bonus shares rather than paying dividends. Bonus shares are also called capitalizing on profits and distributed to its shareholders from either reserves or pre-earned income for the company.
The Advantages of the bonus shares:
Companies issue bonus shares rather than paying a dividend in cash. Any investor can get various benefits as follows:
- Investing in a company is the most important way to support its growth. It can also show your faith in that company’s long-term future.
- If companies decide to pay the dividends in cash, then it will be best for an investor to hold on to a number of shares. By doing so, he/she can generate a favorable amount of money as a reward.
- It is the shareholders’ desire to have a dividend payout every time there is one. Some companies don’t always pay out dividends and that’s when bonus shares help satisfy them since any remaining cash can be shared with the company’s owners (shareholders).
- The Bonus shares are a way to add goodwill to the company. It helps create a good reputation for companies and their shares, which in turn makes it more attractive for investors.
Disadvantages of the bonus share:
Some investors who are more inclined in liquidity may opt to sell bonus shares rather than hold on to them. This is because they want the money aside from their original stake in a company. However, selling these shares could reduce their overall value and influence as that of an investor.
In a company that issues bonus shares, the amount of money needed to govern such plans is much more costly than regular dividends by cash as it can accumulate for many years.
Allowing for bonus shares is a long process, and it can often be delayed due to the process of obtaining them by the central government using SEBI.
What is a Stock Dividend?
The payment made in shares to issue wealth is called a stock dividend. It’s also known as scrip dividends because stock titles can only be traded on the secondary market with cash or other similar securities.
Advantages of The Stock dividends:
YIELDING INCOME: One can invest in stocks with the expectation of earning a steady income from dividends. To make sure that you’re choosing good stocks, find ones yielding profitable dividends and once this is done, you’ll have a reliable source of income for many years to come.
DOUBLE PROFITS: If you’re looking for a way to make your investments more profitable, investing in stocks with dividend yields is one of the best ways. If the stock rises by 40% and you receive a 4% dividend yield combined, it would be almost as if there was no capital appreciation from the investment at all. This can lead to great financial gains when compared to investing in companies that do not have any dividends (like say Amazon).
DIVIDEND REINVESTMENT: Dividend reinvestment is an investment strategy that helps to increase your portfolio stability by utilizing dividends received from stocks.
LONGSTANDING INVESTMENT: Most investors use stock dividends as a long-term investment strategy, which provides income and helps compound their money. It is best for those who prefer to hold stocks for a long period of time in order to reap the benefits thereof.
Disadvantages of Stock dividend:
In times of uncertainty, the market may interpret a stock dividend as being a lack of cash or insecurities. This is why stocks could potentially drop when they are issued and why their prices might not be stable during that time.
A dividend cut is when a company decides to reduce the dividends they currently payout. Share prices will then fall, and investors may be affected by this decision which harms them. The board of directors changes their policy on dividends from time to time as well so it can affect shareholders in different ways depending on when we are talking about it.
Investors may be skeptical of low-growth companies because the high profits that these companies offer are often given to their shareholders. This is where a lot of investors get in trouble with the risk involved when investing in such low-growth firms. Low growth means a lower potential for returns than most other investments and can lead to losses if things take a turn for the worst, leaving those who invested without much recourse or any company reprieve from losing funds they were entrusted with.
Difference Between Bonus Shares and Stock Dividend
A “bonus share” is a type of share that has been given to the company’s shareholders by their profits. Stock dividends are payments given from the company, and they’re usually relative proportionate to how much you own in each piece of stock.
One of the main purposes of bonus shares is to increase retail participation in a company’s stock. The other purpose, which varies from less frequent, involves sharing profits with shareholders via dividends. Dividends are one way for companies and investors alike to share wealth back with their shareholders.
Shareholders of the company are given bonus shares based on a ratio. The stock dividend is not distributed equally to shareholders, but it instead is decided by the company itself.
Directing your attention to bonus shares as a non-monetary reward/benefit is something that makes sense. Stock dividends are given when the company’s profit exceeds its earnings for that year and it’s considered as a monetary benefit.
If a company has incurred losses, it can still issue bonus shares to its shareholders. This is done by dipping into the reserves of the company. The act also states that stock dividends are only paid when companies have earned enough profit for them at the end of every year.
Conclusion
Investing is a crucial part of achieving financial security, which helps with retirement and accumulating wealth. Most individuals use it to fund business expansions as well. In reality, every investment comes with its own set of risks that are different from another’s benefits and vice versa.
Some of the terms under dividend investing may be unfamiliar to some investors. This article focuses on clarifying these benefits, restrictions, and definitions to help the investor choose the right investments in stock and shares that are available when making a difference in their daily lives.
This article briefly discusses why it’s a potential idea to invest in shares of superior companies that have declared their issuance of bonus shares. It briefly mentions the advantages and disadvantages that can come with buying these shares, such as continuing growth for the company and what this signifies about future potentials for investors.