What is Scrip Dividend Investing? A scrip dividend, also called capitalization deal or initial public offering dividend, is an agreement under which a company issues company shares usually at a low cost and pays them out to existing investors when they become vested. This means that the shares are valued less than the price per share. It is the companies’ way of saying “we need your money to run the business.”
How are company shares priced? Company shares are always priced according to their supply and demand and the value of the company. Supply is what the supply of the shares is; what is the demand? Companies don’t always issue a dividend because there is a lot of debt (stocks) and stocks that are not liquid so it makes sense to offer them in a company-owned manner.
Companies like the ones mentioned above can make money this way. A company issuing a dividend has to look at its profit margins. If it doesn’t have enough profits, it won’t be able to offer large dividends. However, they can issue a high dividend if they do well enough to pay themselves back (the company will pay the dividend out to the investors).
If you invest in what is scrip dividend paying companies, it’s very important to understand what is scrip dividend investing. I’m sure you know the basic definition but for this article, we’ll focus on what is scrip dividend investing. It’s basically buying company stock that has a low price and is being issued by a company that is publicly held.
There are several reasons why a company would issue a dividend, primarily because they need money. Other reasons could be because of over-capitalization or poor management. Over-capitalization is usually caused by the purchase of too many assets by the business or organization. Poor management could mean that the company isn’t run efficiently. Either way, investors may not be seeing enough return on their investment. So what they do is pay the dividend out to the investors.
What makes a dividend payment attractive to investors is that they don’t have to pay capitalization charges. Capitalization is when you pay out a dividend in addition to your regular income tax payments. So instead of paying taxes on your dividend check, you’re only paying taxes on the income from that dividend. This saves money for the investor.
Investing in what is scrip dividend paying stocks requires some skill. If you’re investing with a broker then he or she can do most of the work for you. You just give him or her information about the company and how much you want to pay out each year. The broker then provides you with a list of companies that are offering what is scrip. The scrip dividend offers vary from company to company but the main idea is to get a percentage of the yearly dividends paid by the company.
When it comes down to it there are several advantages to this type of investment. One of the main benefits is that you don’t have to pay capital gains tax on your investment. However you must remember that the tax rate can change from year to year. Another advantage is that you only pay tax when you receive your actual dividend. So if you invest for five years and only receive one scripper payment, you only have to pay capital gains tax on the one year of your investment. The other scrip dividend payment is subject to an annual return on your investment, which means it will grow over the years until you stop paying it.