I’m writing because I’m struggling to understand how to properly handle scrip dividends. In Spain, these allow shareholders to choose between receiving a cash dividend or additional shares. I’ve searched the forum and found the following approaches:
If you opt for cash, record it as a dividend.
If you opt for new shares, this could be treated as either a stock split or as a combination of an outbound delivery and an inbound delivery with the same total value, or alternatively, as a dividend followed by a purchase of new shares.
Now, what if I decide to sell the preemptive rights that I’m granted? My approach is to record an inbound delivery using the gross dividend per share as the value of the rights, followed by the sale transaction.
However, I’m confused because the entire scrip dividend process essentially represents an increase in the company’s capital. Whether I choose the cash dividend or sell the rights on the market, they should be handled similarly since they are economically equivalent (though tax implications might differ). The dividend isn’t a capital gain, but a compensation for not receiving new shares and thus being diluted.
Therefore, I feel like I’m not actually gaining anything from the stock. The company’s net worth remains the same, but my share of it is reduced. As a result, recording it as a dividend transaction doesn’t seem right to me.
How would you handle all these three options?
I hope I’ve explained myself clearly. Thank you very much.
Hey alvarodel8,
I would book is as a dividend for either alternative. From there you can decide if you purchase shares for the dividend amount, and from there you can decide to immediately sell the shares again.
This way all three option start the same way and fork from there (keeping dividends or getting shares) and fork from there again (keeping shares or selling the rights)
if you have explicit rights, then rights are themselves a security, you should record inbound delivery for them, they get market quotation, you can sell them or if not, they expire (outbound delivery), or exercised (outbound delivery followed by buying or inbound delivery of shares).
Thanks for your replies! I’ve tried all the different approaches I could think of. Given that Security A represents the company’s shares, and Security B refers to the rights, I have considered the following:
Recording a dividend in A, plus a buy and sell in B, gives me a TTWROR of 14.30% for A, -6.88% for B, and 1.68% for the whole portfolio.
If I record the dividend, buy, and sell all in B, I get 11.02% for A, 86.23% for B, and still 1.68% for the portfolio.
Recording an inbound and a sell in B shows 11.02% for A, -6.88% for B, and 1.50% for the portfolio.
Lastly, recording a dividend in A for the total result gives 14.24% for A and 1.62% for the portfolio.
My thinking is that the first and second approaches seem off because the gain should be attributed to A rather than being shown separately. The third approach doesn’t seem to reflect the gain in the overall portfolio performance. The last one looks more accurate to me. What do you think?