What’s it: Stock dividend is a type of dividend in which companies distribute additional shares to ordinary shareholders. It is an alternative to cash dividends, where companies distribute cash to shareholders.
Distribution to each shareholder is proportional, according to their current ownership. The company usually states it as a percentage of shares owned by shareholders. For example, a company announces to pay a stock dividend of 20%. After the distribution, shareholders who have 1,000 shares will get 200 additional new shares. Therefore, the total share ownership increases to 1,200 shares.
When did the company do it
Stock dividends can replace or as a combination of cash dividends. In a sense, the company only pays shares over cash. Or, the company might pay stock dividends as well as cash dividends.
Stock dividends can be an option when the company’s cash position is insufficient. Or, when companies want to encourage more trade of their stocks by reducing the stock market price.
The company’s value is unchanged. Although the number of shares outstanding has increased, share prices have tended to fall due to this transaction.
Advantages of stock dividen
Because it does not pay cash, the company saves money needed to operate the business. That way, the company can capture more expansion opportunities in the future.
Meanwhile, for shareholders, the advantage is that additional stock is not taxed until sold. It is not like cash dividends, which represents as income in the year of receipt.