Over the many sessions I have taught this course, I have seen many posts from FIN110 students saying that they rather take a cash dividend as opposed to a stock dividend. The rationale, I guess, is that if additional stocks are being given to the shareholder in lieu of cash, the shares may decrease in value in the future.

Question

While this argument may make some sense on the surface, there are two important issues that must also be considered. First of all, where as cash dividends are fully TAXABLE in the year received, additional stocks-in form of stock dividends- are TAX DEFERRED until those shares are sold in the future. Secondly, the “secret” to any type of long term, successful portfolio accumulation program is to increase your NUMBER of stock or mutual funds shares as much as possible over the long run. The more shares you have, the POTENTIAL for all of these share to appreciate over time. So, while stock splits or stock dividends may not do anything drastic for your CURRENT net worth, they are desirable tools for increasing your net worth over the long run. What do you guys think of all of this? Does it make sense to you? Why or why not ?

Also…there are many ways to increase your stock and mutual funds portfolio over time. Reinvesting all dividends and capital gains back into buying more shares in one way. Another way is through a method called DOLLAR COST AVERAGING. Who can tell me HOW dollar cost averaging works and what are some benefits of it? : )

http://en.wikipedia.org/wiki/Dollar-cost_Averaging

I think most economic studies on DCA indicate it is less worthwhile than investing single sums.