Definition of a Stock Dividend
A stock dividend is a dividend consisting of additional shares of stock. Assume that before a corporation declares a stock dividend, it has 25,000 shares of common stock outstanding with each of its 25 stockholders holding 1,000 shares. After a 10% stock dividend, each stockholder will have 1,100 shares and the corporation will have 27,500 shares outstanding. This means that before and after the stock dividend, each stockholder owns 4% of the corporation (1/25 and 1.1/27.5). Basically, the corporation has not changed, it simply increased everyone’s number of shares of stock proportionately.
Definition of a Cash Dividend
A cash dividend is a distribution of part of a corporation’s cash. If a corporation has 25,000 shares of common stock outstanding and it declares and pays a cash dividend of $3 per share, the corporation will distribute $75,000 of its cash to the common stockholders. In addition to reducing the corporation’s cash balance, it reduces the corporation’s retained earnings, which is part of its stockholders’ equity.
Reasons for a Stock Dividend
A corporation might issue a stock dividend instead of paying a cash dividend for the following reasons:
- To increase the number of shares of stock outstanding
- To reduce the market price per share of stock
- To transfer some of the corporation’s retained earnings to paid-in capital
- To minimize distributing the corporation’s cash to its stockholders
