Stock Dividend
Candlefocus EditorWhen a stock dividend is declared, a company will select a percentage of existing shares, often between 5-25%, which it will make available for the dividend. The dividend rate for the stock dividend is determined by the board of directors and is usually determined by the size of the dividend relative to the total number of outstanding shares. For example, a 5% stock dividend will provide one share for every 20 existing shares held. Shareholders do not have to purchase these additional shares as they are automatically issued to them. Stock dividends are not considered to be taxable income since shareholders are not paying for the additional shares.
Stock dividends tend to be attractive to shareholders since they represent a form of income that is not taxable when it is issued. This can be especially beneficial for investors who are in higher tax brackets or live in states with higher taxes. As shares are not purchased but simply issued, stock dividends are also a relatively inexpensive way for companies to reward shareholders. In addition, stock dividends can be used to preserve a company’s cash reserves as it does not have to use funds to make the yearly dividend payments.
However, stock dividends also have drawbacks. Just like stock splits, stock dividends will dilute the share price as the total available shares increase. This can be especially detrimental for shareholders with a large number of shares in the company. In addition, since the value of the company remains the same when a stock dividend is issued, shareholders will not benefit if the company values increases after the dividend is issued.
Overall, stock dividends can be a great way for companies to reward their shareholders without having to make cash payments. Shareholders are typically enticed by the idea of receiving a dividend payment that is not subject to taxation. However, investors considering stock dividends should also consider the drawbacks and decide if this form of dividend payment is right for them.