How a Stock Dividend Works?
A stock dividend is an additional share of a company’s equity distributed to existing shareholders. A stock dividend, as opposed to a cash dividend, which includes the payment of cash to shareholders, pays stockholders with more shares of the company’s stock on a pro-rata basis. A stock dividend works as follows:
1. Board of Directors Declaration: A stock dividend is normally declared by the company’s board of directors. They may elect to divide earnings or indicate confidence in the company’s future by issuing new shares to existing owners.
2. Dividend Percentage Calculation: The percentage of the equity dividend is determined by the board of directors. This percentage is the proportion of new shares distributed for each existing share held by a shareholder.
3. Distribution on a Pro-rata Basis: The stock dividend is distributed pro-rata, which means that each shareholder receives more shares in proportion to their current stake in the company. If a shareholder holds 100 shares and the stock dividend is 10%, they will receive an additional 10 shares.
4. Share Price Impact: In theory, a stock dividend should have no effect on an investor’s entire position value. The greater share distribution is compensated by a corresponding reduction in the stock price. The investment’s entire market value remains unchanged.
5. Tax Treatment: Stock dividends are often not taxed at the time of distribution in many jurisdictions. When shareholders eventually sell their shares, they may be required to pay capital gains taxes on the difference between the selling price and the initial cost basis of both the original and additional shares.
6. Financial Statement Impact: A stock dividend has no effect on the company’s overall equity. It is effectively a redistribution of stock among current shareholders. While the number of outstanding shares grows, each shareholder’s proportional ownership position remains constant.
What are Dividend Stocks and How it Works?
A dividend is a sum of money that a company pays to its stockholders; typically, this takes the form of cash or more shares. It is normally distributed on a regular basis, most frequently on a quarterly basis, and reflects a portion of the company’s profits. Businesses that turn a profit sometimes decide to give dividends to their shareholders from those profits. A company’s board of directors may choose to distribute a portion of its profits as dividends when the business is profitable.
Table of Content
- What are Dividend Stocks?
- How a Stock Dividend Works?
- Types of Dividend
- How Do Dividends Affect a Stock’s Share Price?
- Why do Companies Pay Dividends?
- Calculation of Dividends
- Advantages of Stock Dividends
- Disadvantages of Stock Dividends