Security Analysis – periodic stock dividends

Excerpt from Security Analysis, a book by Benjamin Graham and David Dodd re: stock dividends and the important advantages of periodic stock dividends:

1. The stockholder can sell the stock-dividend certificate, so that at his option he can have either cash or more stock to represent the reinvested earnings. Without a stock dividend he might in theory accomplish the same end by selling a small part of the shares represented by his old certificate, but in practise this is difficult to calculate and inconvenient in execution.

2. He is likely to receive larger cash dividends as a result of such a policy, because the established cash rate will usually be continued on the increase number of shares.  For example, if a company earning $12 pays out $5 in cash and 5% in stock, in the next year it will most probably pay $5 in cash on the new capitalization, equivalent to $5.25 on the previous holdings. Without the stock dividend, it would probably continue the $5 rate unchanged.

3. By adding the reinvested profits to the stated capital the management is placed under a direct obligation to earn money and pay dividends on these added resources. No such accountability exists with respect to the profit and loss surplus. The stock-dividend procedure will serve not only as a challenge to the efficiency of the management but also as a proper test of the wisdom of reinvesting the sums involved.

4. Issues paying periodic stock dividends enjoy a higher market value than similar common stock not paying such dividends.

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