Stock Dividends and Stock Splits

Some companies choose to stay with the cash and pay stock dividends, a dividend paid in stocks. Then companies re-capitalize their earnings and issue new shares which does not affect their assets and liquidities.

You should notice immediately that receiving a stock dividend does not make stockholders increase their fortune. Shareholders that receive these stock dividends purchase more shares from the company’s stock, but due to the fact that assets and liabilities of a company are kept the same the price of the stock should drop to take into account dissolution.

For shareholders this situation is similar to a piece of cake. You can cut a piece in two, three or four parts; it really doesn’t matter in how many parts you cut it , the size of the whole cake won’t change.

After a stock dividend shareholders receive more shares, but proportion of interests over what one owns in the company stays the same, and the price in the market drops proportionally.

Stock dividends are usually expressed as a percentage of the number of shares outstanding. For example, if a company announces a 10% stock dividend and has 100,000 shares outstanding, the total shares outstanding will increase to 110,000 shares after issuance of stock dividends.