By law, if a company pays dividends, it must pay them in proportion to the number of shares a person owns in that company. The holder of 200 shares of Harley-Davidson, for example, will receive twice as many dividends as the holder of 100 shares. A corporate distribution for which this is not the case is a gift. For instance, at one time Wrigley sent one carton of Juicy Fruit chewing gum to each of its shareholders regardless of the number of shares they held. Because everyone received the same amount, the gum was a gift.

Corporations may pay three types of dividends to their shareholders: cash dividends (the most common kind), stock dividends, and property dividends.

Cash Dividends. Most firms have an established dividend payment schedule through which a portion of the firm’s profits are returned to the shareholders. These dividends may be received as cash dividends (via a check from the company), or they can sometimes be reinvested in additional shares of stock in the firm. This latter option occurs via a dividend reinvestment plan (DRIP), which always provides for the purchase of fractional shares and sometimes allows shareholders to buy these shares at a slight discount from the prevailing market price. Securities may be held in your name or in a street name.1 If you buy stock registered in a street name, your name is not on the stock certificate; it bears the name of a Wall Street firm. Your brokerage firm holds the shares, and allocates the one large dividend check it gets on behalf of perhaps thousands of individual shareholders. Most brokerage firms automatically transfer any excess cash in an account into a money market fund of some type. This is a good arrangement because it reduces to a minimum the unproductive time for the dividends. If, instead, the portfolio manager receives dividend checks directly, she needs a temporary haven for these funds until they accumulate sufficiently to finance the purchase of more securities or until they are paid as income to the fund beneficiary. Most portfolio managers have some money market instrument available for this purpose.

Stock Dividends. Stock dividends are paid in additional shares of stock rather than in cash. Firms typically announce these as a percentage, such as a “10 percent stock dividend.” This means that if you hold 1,000 shares, you would receive an additional stock certificate for 100 shares. The person who holds 100 shares will get 10 more. If you hold an odd lot, you will receive a check for the value of the fractional shares that cannot be distributed. You might, for instance, hold 221 shares. A 10 percent stock dividend would result in your receiving an additional 22 shares and a small check for the value of the remaining 1/10 share. It is not completely clear why firms issue stock dividends, but we do know several things about them. First, they are popular when a firm lacks the funds to pay a cash dividend. They are especially common in the infancy or adolescent stages of a firm’s life cycle. Second, many shareholders seem to like them. It is common for a firm to establish a regular pattern of paying both a cash dividend and a stock dividend.

Property Dividends. As the name implies, a property dividend is the distribution of physical goods (such as a firm’s products) to shareholders, with each shareholder receiving an amount proportional to his stock holding. Property dividends are rare. They were more popular in the early days of our capital markets, when the number of shareholders in a particular company was likely to be small and the company produced something that could conveniently be distributed.