Stock dividend

A stock dividend is a payment made by a corporation to its shareholders in the form of additional shares, rather than cash.
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Updated on Jun 6, 2024
Reading time 3 minutes

3 key takeaways

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  • Stock dividends distribute additional shares to shareholders, increasing the total number of shares outstanding.
  • They do not involve a cash outflow from the company but can dilute the value of existing shares.
  • Stock dividends can signal a company’s growth and confidence in its future prospects.

What is a stock dividend?

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A stock dividend is a distribution of additional shares to existing shareholders of a corporation, based on the number of shares they already own. Unlike cash dividends, which provide shareholders with a direct cash payment, stock dividends reward shareholders with more shares of the company. This form of dividend is typically issued when a company wishes to reward its investors but prefers to retain cash for business operations or growth initiatives.

How stock dividends work

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When a company declares a stock dividend, it allocates additional shares to shareholders proportionally. For example, if a company declares a 10% stock dividend, a shareholder owning 100 shares would receive an additional 10 shares, bringing their total holdings to 110 shares. This increases the total number of shares outstanding, which can lead to a dilution of the stock’s price per share.

Example of a stock dividend

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Consider a company that declares a 5% stock dividend. If a shareholder owns 200 shares, they would receive an additional 10 shares (5% of 200), bringing their total to 210 shares. The overall value of their investment does not change immediately, but they now hold more shares, which could potentially appreciate in value if the company performs well.

Reasons for issuing stock dividends

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Companies may choose to issue stock dividends for several reasons:

  • Preserve cash: By issuing stock dividends, companies can conserve cash, which can be used for reinvestment in the business, debt repayment, or other strategic initiatives.
  • Signal growth: Issuing stock dividends can signal to the market that the company is confident in its future growth prospects and prefers to reinvest profits rather than distribute them as cash.
  • Increase liquidity: Stock dividends increase the number of shares outstanding, which can enhance the stock’s liquidity and make it more attractive to investors.

Impact on shareholders

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The issuance of stock dividends affects shareholders in several ways:

  • Dilution of share value: Although shareholders receive more shares, the overall value of their holdings remains the same initially. For example, if a company doubles the number of shares outstanding, the stock price might approximately halve, assuming no other market changes.
  • Tax implications: In some jurisdictions, stock dividends may have different tax implications compared to cash dividends. Shareholders should consult with tax advisors to understand the impact.
  • Potential for capital gains: If the company grows and its stock price increases over time, shareholders can benefit from capital gains on the additional shares received.

Stock dividends are a way for companies to reward shareholders without depleting cash reserves. They can be an attractive option for growth-oriented companies that wish to reinvest earnings into the business.

For shareholders, stock dividends increase the number of shares they own and can potentially lead to capital gains if the company continues to grow. Understanding the implications of stock dividends is essential for investors to make informed decisions about their investment portfolios.


Sources & references

Arti

Arti

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Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...