Stock Dividend

What Is a Stock Dividend?

A stock dividend is a dividend payment to shareholders that is made in shares as opposed to as cash. The stock dividend enjoys the benefit of rewarding shareholders without reducing the company's cash balance, despite the fact that it can dilute earnings per share.

These stock distributions are generally made as portions paid per existing share. For instance, a company could issue a stock dividend of 5%, which will expect it to issue 0.05 shares for each share owned by existing shareholders, so the owner of 100 shares would receive five extra shares.

How a Stock Dividend Works

Otherwise called a "scrip dividend," a stock dividend is a distribution of shares to existing shareholders in lieu of a cash dividend. This type of dividend might be made when a company needs to reward its investors yet doesn't have the spare cash or needs to protect its cash for different investments.

Stock dividends have a tax advantage for the investor. The share dividend, similar to any stock share, isn't taxed until the investor sells it except if the company offers the option of taking the dividend as cash or in stock.

A stock dividend might expect that the recently received shares are not to be sold for a certain period of time. This holding period on a stock dividend normally begins the day after it is purchased. Understanding the holding period is important for determining qualified dividend tax treatment.

On the off chance that a stock dividend has a cash-dividend option, taxes will be due even on the off chance that the owner doesn't sell the shares.

Dilution Effect

The board of a public company, for instance, may support a 5% stock dividend. That provides existing investors with an extra share of company stock for each 20 shares they currently own. Notwithstanding, this means that the pool of accessible stock shares in the company increases by 5%, diluting the value of existing shares.

Subsequently, in this model, an investor who owned 100 shares in a company will possess 105 shares once the dividend is executed. In any case, the total market value of those shares remains something similar. Along these lines, a stock dividend is like a stock split. It is not necessarily the case that the market value of the shares will remain something very similar. The incentive behind the stock dividend is the expectation that the share price will rise.

Accounting for Small versus Large Stock Dividends

At the point when a stock dividend is issued, the total value of equity remains something very similar from both the investor's viewpoint and the company's point of view. Be that as it may, all stock dividends require a journal entry for the company issuing the dividend. This entry transfers the value of the issued stock from the retained earnings account to the paid-in capital account.

The amount moved between the two accounts relies upon whether the dividend is a small stock dividend or a large stock dividend. A stock dividend is viewed as small on the off chance that the shares issued are under 25% of the total value of shares outstanding before the dividend. A journal entry for a small stock dividend transfers the market value of the issued shares from retained earnings to paid-in capital.

Large stock dividends are those wherein the new shares issued are over 25% of the value of the total shares outstanding prior to the dividend. In this case, the journal entry transfers the par value of the issued shares from retained earnings to paid-in capital.

An Example of Stock Dividends

For instance, in the event that a company were to issue a 5% stock dividend, it would increase the number of shares held by shareholders by 5% (one share for each 20 owned). In the event that there are 1,000,000 shares in a company, this would convert into 50,000 extra shares. In the event that you owned 100 shares in the company, you'd receive five extra shares.

This, nonetheless, similar to the cash dividend, doesn't increase the value of the company. On the off chance that the company was priced at $10 per share, the value of the company would be $10 million. After the stock dividend, the value will remain something very similar, yet the share price will diminish to $9.50 to adapt to the dividend payout.

Features

• Stock dividends are not taxed until the shares granted are sold by their owner.
• A stock dividend is a dividend paid to shareholders in the form of extra shares in the company, as opposed to as cash.
• Like stock splits, stock dividends weaken the share price, however similarly as with cash dividends, they additionally don't influence the value of the company.

FAQ

What Is the Difference Between a Stock Dividend and a Cash Dividend?

While a stock dividend is paid out in the form of company shares, a cash dividend is paid out in cash. For instance, consider a company that has a 7% annual stock dividend. This would entitle the owner of 100 shares to 7 extra shares. On the other hand, consider a company that issues a $0.70 annual cash dividend per share, which in turn, would entitle the owner of 100 shares to a total value of $70 in dividends annually.

What Is a Stock Dividend?

At the point when a company issues a stock dividend, it is issuing a dividend in the form of shares, instead of cash. Likewise alluded to as a scrip dividend, a stock dividend will grant a shareholder a negligible portion of shares comparable to their right now held shares. For instance, in the event that a company issues a 3% stock dividend, a holder of 1,000 shares will receive 30 extra shares as part of the dividend payout.

For what reason Do Companies Issue Stock Dividends?

A company might issue a stock dividend on the off chance that it has a limited supply of liquid cash reserves. It might likewise decide to issue a stock dividend on the off chance that safeguarding its existing supply of cash is trying. While issuing a stock dividend basically weakens the value of the outstanding shares since it increases the total supply of stock, on the off chance that the shares were to rise in price, this can be advantageous for the shareholders. In the mean time, stock dividends are not taxed until they are sold, not normal for cash dividends.