Sample Essay

Cash dividend is the portion of net income which is disbursed to shareholders. The net income of a company is divided into two parts which includes the retained earnings which are retained by the company and cash dividends which are paid to shareholders. Cash dividends are approved and announced by board of directors of a company and are usually paid annually, semi annually or quarterly depending on the size and structure of the company’s profits. Periodic share repurchases on the other hand are repurchases of shares by the company from its shareholders. The shareholders are offered a higher price than the market price of the shares they own.

Cash dividends are subject to tax in the year which they are distributed while stock repurchases are not subject to a significant amount of tax as compared to dividends. Stock repurchases also give an option to shareholders to sell their shares at a higher price than the market value of shares. The amount of cash dividend per share is dependent on the net income of the company and is predetermined by the board of directors and is usually lower than the amount offered for stock repurchase. Stock repurchases would be more desirable as they would offer a higher advantage in terms of cash flows, tax savings and personal preference and the amount of cash received from the repurchase could be invested in other securities at market value.

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