Certified Financial Management Specialist Practice Exam

Which dividends option allows shareholders the choice between cash or additional shares?

1. Hybrid Dividend Policy

2. Stable Dividend Policy

3. Dividend Reinvestment Program (DRIP)

4. No Dividend Policy

The correct answer is: Dividend Reinvestment Program (DRIP)

The dividend option that allows shareholders the choice between cash or additional shares is known as the Dividend Reinvestment Program (DRIP). This program enables investors to reinvest their cash dividends into purchasing additional shares of the company's stock, often at a discounted rate. This reinvestment strategy not only provides shareholders with the flexibility to choose how they want to receive their dividends but also encourages long-term investment in the company. By opting into a DRIP, shareholders can benefit from compounding growth over time, as reinvested dividends can lead to the acquisition of more shares, which may generate additional dividends in the future. This mechanism is appealing to investors who are focused on long-term growth rather than immediate cash flow. Other options do not provide this specific choice. For instance, a hybrid dividend policy doesn’t inherently offer a choice between cash and shares, but rather combines elements of special and regular dividends. A stable dividend policy focuses on maintaining consistent dividend payouts, which means shareholders typically receive cash dividends without an option for shares. No dividend policy indicates a complete absence of dividend payments, hence not applicable to this scenario.