When a company pays a stock dividend, it’s a way for the company to share its financial success with its investors. When a company offers a stock option plan, it’s also a way for the company to share its financial success, but with its employees. Many companies pay stock dividends, but not many companies offer stock option plans.
Stock Basics
Stocks come in two basic types -- common stock and preferred stock. Different variations exist of both types, but we’ll stick with the basics. Just by reading their names you can almost tell there is a difference between the two. Preferred stock typically gets reserved for company executives, although many companies offer preferred shares on the open market. Preferred stock has certain advantages over common stock. For example, preferred stockholders receive a guarantee dividend plus, in the event a company goes belly up, preferred shareholders have first rights to company assets over common stockholders. On the other hand, common stockholders may not receive a guaranteed dividend, but common stock typically appreciates faster than preferred stock. Also, preferred stockholders do not receive voting rights like common stockholders.
Stock Dividends
Dividends represent a percentage of the company’s earnings given back to its shareholders. Most often you’ll see this stated as dividend-per-share. For example, if a company pays a dividend of $0.05 per share and you own 10,000 shares then you’ll get a dividend (usually quarterly) of $500.00. Companies do not have to pay dividends in cash, although most do. Dividends require that you have ownership of the stock by a certain date, called the record date.
Stock Options
Employee stock option plans offer company personnel a way to own the company’s stock at a price discounted from the current market price. When you participate in an employee stock option plan, you do not own the stock, but you have the right to purchase the stock at some point in the future. Some companies give each employee a set number of shares based on the employee’s hierarchy within the company. At some point when you decide to buy the stock, commonly known as exercising the option, you can purchase the shares at a reduced market price, often a substantial number of percentage points less than current market value.
Are You Qualified?
Employees have two different stock options available to them -- qualified plans and nonqualified plans. Typically upper management gets the qualified or incentive plans. These plans provide stock options based on the employee’s and the company’s overall performance. They also receive different tax treatment than nonqualified plans. The rest of the company typically receives the nonqualified plans.
Conclusion
Owning a stock that pays a dividend is a good way to reap a reward from your investments. As an investor, you don’t have to work for a company to buy its stock and receive any dividends when paid. With an employee stock option plan, you must work for the company in order to participate in the plan. Plus, the kind of option plan that’s available to you depends on your status within the company. If your company offers a stock option plan and the company’s stock pays a dividend, that’s an added bonus, but remember you don’t get the dividend until you exercise the option and can prove you are the owner of record on the record date.
