Sometimes companies offer shareholders a way of taking dividends in the form of company shares. There are two types of scheme: a traditional scrip scheme or a Dividend Re-Investment Plan (DRIP).
In a scrip scheme, the cash dividend is not paid to those holders opting to receive shares. Instead, shares are allotted to participating holders and share certificates sent to them on the payment date. If the amount of the dividend is not divisible exactly by the share price and there is a fraction of a share left over, this is then either paid to the shareholder, added to the next dividend, retained by the company or given to charity depending on the terms of the scheme. Basic rate tax is still deducted from the dividend amount within scrip and DRIP schemes.
The difference with a DRIP is that no new shares are issued. Instead, participants in the scheme have their cash dividend paid directly to the scheme administrator, which is usually the company's registrar. The administrator then calculates the number of shares to which each participant is entitled and buys the shares on the stock market. Because the share purchases can be aggregated, the dealing costs tend to be relatively low. Shares are then distributed to the participants.
As with other share dealing schemes, the administrator will obtain the best price it can for the purchase. The volume of the shares purchased can lead to a more or less favourable price.
