The stock dividend is when a company gives extra shares of its own stock to its existing shareholders instead of paying cash. So, if you own 100 shares and the company announces a 10% stock dividend, you’ll get 10 more shares, making it 110 total.
Definition of Stock Dividend
A stock dividend is when a company gives additional shares of its stock to its existing shareholders instead of paying them in cash.
Why Do Companies Offer Stock Dividends?
There are a few key reasons:
- To conserve cash: Especially useful when companies want to reward investors but need to hold onto cash for growth, debt, or operations.
- To signal confidence: It shows the company is confident in its future and wants shareholders to benefit from its growth.
- To improve liquidity: More outstanding shares can lead to more trading and potentially smoother price movement.
Types of Stock Dividends
Stock dividends can come in a few forms. Here’s a quick look at the most common types:
1. Small Stock Dividend
- Typically, less than 20-25% of the shares you own.
- Treated as a regular dividend for accounting purposes.
Example: You own 200 shares, and the company issues a 10% dividend — you get 20 extra shares.
2. Large Stock Dividend
- More than 25% of the current shares are owned.
- Often handled like a stock split in accounting.
Example: You own 100 shares, and the company issues a 50% stock dividend — you now own 150 shares.
3. Bonus Issue (Closely related to stock dividends)
Some companies call it a bonus issue — it’s the same idea: giving shareholders free additional shares.
Benefits of Stock Dividends:
1. You Own More of the Company:
The Shareholders get more shares, which means a bigger piece of the pie (even if the pie is cut into more slices).
2. No Immediate Tax:
In many regions, stock dividends aren’t taxed until shares are sold. That can be a big tax advantage compared to cash dividends.
3. Compounding Power:
If the company keeps growing, the new shares grow in value too. Over time, stock dividends can compound returns.
4. Good for Long-Term Investors
If planning to hold for years, stock dividends help to build a larger position without spending more money.
Do Stock Dividends Dilute Share Value?
When a company issues more shares, the stock price usually drops proportionally to keep the overall value the same.
So while each share is worth slightly less, the total value of the investment stays roughly the same (at first).
Example:
If you own 1 share worth $100, and get a 10% stock dividend, you’ll now have 1.1 shares worth about $90.91 each.
Total value = 1.1 × $90.91 = $100.
Over time, if the company grows, the bigger share count could be worth more.
Difference Between Stock Dividend vs. Cash Dividend:
| Feature | Stock Dividend | Cash Dividend |
|---|---|---|
| Payout Type | More shares | Actual cash |
| Cash Impact | No cash paid out | Cash leaves the company |
| Tax Timing | Usually delayed | Usually taxed when paid |
| Shareholder Impact | Increases share count | Doesn’t change share count |
Final Thoughts
A stock dividend is like a thank-you gift from the company — in shares, not Currency.
While it doesn’t immediately put money in the pocket, it can boost shareholding and help to benefit more from long-term growth.