There are several ways to make money with stocks, but one of the least considered is shareholder distribution. Although this might not happen with regularity, if your company is doing well enough to issue shareholder distributions, you're definitely on the right path.
Definition
What is shareholder distribution?
Shareholder distribution is how companies provide financial returns directly to shareholders. This direct incentive can appear as cash or in other ways that help increase the value of the stock so that investors are indirectly gifted with additional equity.
Companies may do this simply as a sign that the company is very healthy financially and doesn't need the cash to remain on the balance sheet. In other cases, it can be a tax strategy or simply a direct payment to shareholders to reward them for their investment in the company.
Types
Types of shareholder distributions
There are a few different types of shareholder distributions, including:
Special dividends
Most of us are familiar with regular dividends – the magical chunk of cash that shows up periodically when our stocks are doing as they should. For holders of real estate investment trusts (REITs), these are required distributions; for other investors, they may be optional. Special dividends take place when companies have extra cash on hand and are looking to move it to their investors at irregular intervals.
Return of capital
Return of capital sounds like a dividend, but it's something pretty different for tax purposes. A return of capital is not a regular payment. Rather, it's a payment made during major episodes like restructuring or massive accumulations of excess cash. This payment serves to reduce the cost basis for your stocks, effectively lowering your initial purchase cost. For example, if you bought stock in XYZ, Inc. for $50 per share and then later received a return of capital for $30 per share, the true cost of your stocks would be reduced to $20 per share.
Stock buybacks
Stock buybacks might not seem like a shareholder distribution, but they can be considered one, too. This is because, rather than giving you money directly, the company is making a solid move toward increasing the value of your stocks by removing some amount from circulation. Provided you keep your stocks during the process, you should experience an increase in stock values through a stock buyback.
Dividends vs. shareholder distributions
Dividends versus shareholder distributions
Regular dividends are not considered the same as shareholder distributions because they're kind of baked into the stock's incentive structure and determined ahead of time to occur at a regular frequency. Holders of dividend stocks expect the dividends to come, and they're part of the equation when they're trying to choose a stock.
Shareholder distributions, on the other hand, happen irregularly, due to an excess accumulation of cash that's not needed elsewhere in the business. They may come in the form of a special dividend, but this is not the same as a regular dividend, and investors don't know that this is coming when they make their decisions to invest. They're more like rewards for being loyal shareholders.
Related investing topics
Why they matter
Why shareholder distributions matter to investors
Shareholder distributions are not something that investors can count on for income or as an incentive to purchase a stock, but they can make a huge difference in the long term. When your company is giving out shareholder distributions, it generally means that it's doing well, and that's the name of the game.
Even if shareholder distributions are small, the more of them that the company gives over the years, the healthier it may be. Companies are always seeking a balance between profit and reinvestment, and holding stocks of a healthy company that has more cash than it needs isn't a bad thing, provided it's still investing in itself and its product or service line.
