What are Accumulating Shares?

Accumulating Shares refer to common shares that shareholders of a company receive in addition to a dividend or instead of a dividend. Shareholders receive accumulating shares in the form of common stock so that they can avoid paying income tax on distributions received in the current year. 

Despite that shareholders use this technique to avoid paying income tax, capital gains tax must still be paid on shares. Accumulating shares can otherwise be called stock dividends. It can be paid by companies after cash dividends have been given to shareholders.

How do Accumulating Shares Work? 

Generally, investors make investments for regular income, hence, dividends are paid to shareholders in cash to sustain a regular income, except in certain cases. The decision of whether to pay cash dividends to shareholders or not is made by the board of directors of a company. When a company offers accumulating shares to its shareholders, this decision is due to a couple of reasons. 

For instance, the decision to pay accumulating shares might be made to preserve the cash on the company's balance sheet. In a bid to boost the liquidity of a company, accumulating shares can also be distributed to investors. Furthermore, mutual funds are characterized by accumulating shares, this is because investors can either receive their income as cash dividends or reinvest in the income and allow the return to accumulate.