Companies and shareholders: scrip dividends and stock dividends: mandatory stock dividends - overview
Where shareholders are entitled to a share in the company’s profits, this is usually paid in the form of a cash dividend. Some companies issue shareholders with additional shares in the company in place of a cash dividend. This is known as a mandatory stock dividend if no cash alternative is available (for optional stock dividends, see STSM078010).
Mandatory stock dividends are always paid in the form of newly issued shares, in proportion to the shareholding, under the terms of a company’s articles of association. The share value is not discounted (unlike DRIPS STSM078030) but the shareholder saves dealing costs. For the company, stock dividends are a way of capitalising their distributable profits, avoiding the need to pay out cash to shareholders.
The company issues new shares which is outside the scope of the principal charge to SDRT, as there is no transfer of existing securities. Where such shares are issued and delivered to a depositary bank or clearance service, there is no charge to stamp duty or SDRT at 1.5 per cent - see STSM055120.