A Stock Dividend is a dividend payment that a company issues to its registered and existing shareholders from the earning or profits it made in a financial year and is paid in the form of additional shares rather than in the form of cash. They are also called bonus shares or scrip dividends.
Stock dividends exist in companies issuing stock dividends if they require to reward their stakeholders, but they either want to reinvest any existing cash in the business, or they have a limited supply of money.
The fact about stock dividends is that if a company allocates additional shares to its shareholders, it does not increase the total company value; it instead reduces the amount of every single stock.
For example, with a 20% stock dividend a shareholder may end up with 120 shares instead of 100, but since the number of shares in the company has risen proportionally, the single value of each share will have gone down by 20%. Therefore, the sum value of a given stake will not have changed.
The Advantages of Stock Dividends Over Cash Dividend
A key thing to note while investing in dividend stocks is that companies are selfish. Irrespective of the fact that dividends are of great benefit to shareholders, companies pay dividends to attract long term investors.
That is the reason why many companies in the market are paying dividends beyond their means. Many companies advertise nice dividends that they might not actually have money to pay for and end up in debts trying to satisfy their stakeholders.
Another disadvantage of cash dividends is that the money investors set aside are not put under any further growth; it is just idling there to satisfy current investors and entice new ones.
The good thing with the stock dividend is that you might appreciate having more shares regardless of their price if you are investing in a growing company. Is that you won’t pay tax on your stock dividend unless you sell your shares.
If a company agrees to pay a dividend to its stakeholders, it declares the amount and the payable date. The date is set every quarter after the releases its earnings reports, and the company management reviews the financials. A dividend payment in the form of additional stock is as well known as DRIPS or dividend reinvestment.
Depending on the ratio of the sum value of outstanding shares before the dividends to the newly issued shares, the stock dividends may be small or large. If the value of newly issued shares is more significant than twenty-five percent of the total amount of shares outstanding before the payout of the dividends.
How a Stock Dividend Works
A stock dividend value is determined on a per share value criteria and is to be paid on an equal measure to all shareholders of the same level or class.The payment of stock dividend must be approved by a Board of Directors. When a stock dividend is declared, it is consequently paid on a given date known as a payable date.
Stock Dividend Steps from Start to Finish
- The company generates profits or no profit and retains warning if any.
- The board of management decides that the company does not have enough money to pay its dividends in form of cash.
- The board approves the planned stock dividend.
- The company announces the stock dividend giving the value, the date when it will be paid, and the record date.
- The stock dividend is awarded to the stalk holders.
The advantages of stock dividends to companies is that it saves the company’s cash n that if the company does not have enough money to pay its profits in the form of cash, it can pay through shares.
Another advantage to companies is that it increases share liquidity by issuing more stock. The company reduces the price of the share of each individual, which may help to increase shares liquidity.
Stock dividends also have some disadvantages to companies like stock dividends that may be figured as a sign of cash shortage or distress, which may discourage stakeholders from investing more into the company or discourage new investors from joining.