A stock dividend is a payment to shareholders that consists of additional shares rather than cash. The distributions are paid in fractions per existing share. For example, if a company issues a stock dividend of 5%, it will pay 0.05 shares for every share owned by a shareholder. The owner of 100 shares would get five additional shares.
Key Takeaways
- A stock dividend is a payment to shareholders in the form of additional shares in the company.
- Stock dividends are not taxed until the shares are sold by their owner.
- Like stock splits, stock dividends dilute the share price because additional shares have been issued.
- Stock dividends do not affect the value of the company.
- A company may prefer to pay dividends in stock rather than cash to preserve its cash reserves.
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How a Stock Dividend Works
A stock dividendmay be paid out when a company wants to reward its investors, but either doesn't have the spare cash or prefers to save it for other uses. The stock dividend has the advantage of rewarding shareholders without reducing the company's cash balance. However, it does increase its liabilities.
Stock dividends have a tax advantage for the investor as well. Like any stock shares, stock dividends are not taxed until the investor sells the shares.
A stock dividend may require that the newly received shares not be sold for a certain period. Thisholding period typically begins the day after the dividend is received.
Stock Dividend Dilution
Stock dilution is reducing the earnings per share (EPS) and the ownership percentage of existing shareholders when new shares are issued. Unlike cash dividends, which are paid out of a company's earnings, stock dividends include the issuance of additional shares to existing shareholders.
Dilution starts when a company declares a stock dividend. It issues new shares in proportion to the existing holdings of shareholders. The total number of outstanding shares increases, leading to dilution.
When that happens, there is an EPS impact. The earnings are now divided over a larger number of shares, which can reduce the EPS if the company's net income does not increase proportionately. The ownership stake of each shareholder is diluted as the total number of shares increases, although they receive additional shares.
Example of Stock Dividend Dilution
An example of share dilution is as follows:
- Before dilution: If a company has 1 million shares outstanding and earns $1 million, the EPS would be $1 per share.
- After dilution: If a 10% stock dividend is issued, 100,000 new shares are created, making it 1.1 million shares. If the earnings are held constant at $1 million, the new EPS would be approximately $0.91 per share. Thus, the earnings are diluted.
Pros and Cons for Companies and Investors
Pros
The company's cash balance remains the same.
The decrease in share price may attract new investors.
Investors do not owe tax on these dividends until the stock is sold.
Cons
Bonus shares dilute the share price.
Stock dividends may signal the company's financial instability.
Share dividends may be less attractive to some investors than cash dividends.
Advantages and Disadvantages of Stock Dividends
From an investor's viewpoint, receiving stock dividends yields little immediate reward. Then again, there's no tax due until the additional shares are sold.
Issuing share dividends lowers the price of the stock, at least in the short term. A lower-priced stock tends to attract more buyers, so current shareholders are likely to get their reward down the road. Alternatively, they can sell the additional shares immediately, pocket the cash, and still retain the same number of shares they had before.
A public company is not required to issue dividends at all. However, it's not a good look for a company to abruptly stop paying or pay less in dividends than in the past.
For the company, a stock dividend is a pain-free way to issue dividends without depleting its cash reserves.
Journal Entries for Stock Dividends
When a stock dividend is issued, the total value of equity remains the same from the investor's and the company's perspectives.
All stock dividends require an accounting journal entry for the company issuing the dividend. This entry transfers the value of the issued stock from the retained earnings account to the paid-in capital account.
Small Stock Dividend Accounting
A stock dividend is considered small if the shares issued are less than 25% of the total value of shares outstanding before the dividend. A journal entry for a small stock dividend transfers the market value of the issued shares from retained earnings to paid-in capital.
Suppose Company X declares a 10% stock dividend on its 500,000 shares of common stock. Its common stock has a par value of $1 per share and a market price of $5 per share.
When the small stock dividend is declared, the market price of $5 per share is used to assign the value to the dividend as $250,000 — calculated by multiplying 500,000 x 10% x $5.
The common stock dividend distributable is $50,000 — calculated by multiplying 500,000 x 10% x $1 — since the common stock has a par value of $1 per share.
| Account | Debit | Credit |
| Stock dividends | 250,000 | |
| Common stock dividend distributable | 50,000 | |
| Paid-in capital in excess of par-common stock | 200,000 |
When the company distributes the stock dividend, it can make the journal entry:
| Account | Debit | Credit |
| Common stock dividend distributable | 50,000 | |
| Common Stock | 50,000 |
Large Stock Dividend Accounting
Large stock dividends occur when the new shares issued are more than 25% of the value of the total shares outstanding before the dividend. In this case, the journal entry transfers the par value of the issued shares from retained earnings to paid-in capital.
If Company X declares a 30% stock dividend instead of 10%, the value assigned to the dividend would be the par value of $1 per share, as it is considered a large stock dividend. This would make the following journal entry $150,000—calculated by multiplying 500,000 x 30% x $1—using the par value instead of the market price.
| Account | Debit | Credit |
| Stock Dividends | 150,000 | |
| Common stock dividend distributable | 150,000 |
What Is an Example of a Stock Dividend?
If a company issues a 5% stock dividend, it would increase the number of shares by 5%, or one share for every 20 shares owned. If a company has one million shares outstanding, this would translate into an additional 50,000 shares. A shareholder with 100 shares in the company would receive five additional shares.
Why Do Companies Issue Stock Dividends?
Dividends, whether in cash or in stock, are the shareholders' cut of the company's profit. They also are a reward for holding the stock rather than selling it. A company may issue a stock dividend rather than cash if it doesn't want to deplete its cash reserves.
What Is the Difference Between a Stock Dividend and a Cash Dividend?
A stock dividend is paid out in the form of company shares. The stock dividend is not taxable until the shares are sold. A cash dividend is paid out as cash and is taxable for that year. The company will send you a 1099-DIV form at the end of the year.
Is a Stock Dividend a Good or Bad Thing?
Dividends are always good, whether they're in shares or cash. However, if you're buying dividend-paying stocks to create a regular source of income, you might prefer the money.
What Is a Good Dividend Yield?
A dividend-paying stock generally pays 2% to 5% annually, whether in cash or shares. When you look at a stock listing online, check the “dividend yield” line to determine what the company is paying out.
The Bottom Line
A stock dividend is a payment to shareholders made in additional shares instead of cash. The stock dividend rewards shareholders without reducing the company's cash balance. It has the adverse effect of diluting earnings per share.
Stock dividends may signal financial instability or at least limited cash reserves. For the investor, stock dividends offer no immediate payoff but may increase in value over time.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
Internal Revenue Service. "Publication 550: Investment Income and Expenses." Page 22.
Robinhood, "What Is a Stock Dividend?"
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Part Of
Guide to Dividend Investing
- Dividends: Definition in Stocks and How Payments Work1 of 26
- Stock Dividend: What It Is and How It Works, With Example2 of 26
- Cash Dividend: Definition, Example, Vs. Stock Dividend3 of 26
- Companies That Pay Dividends—And Those That Don't4 of 26
- How and Why Do Companies Pay Dividends?5 of 26
- Is Dividend Investing a Good Strategy?6 of 26
- Put Dividends to Work in Your Portfolio7 of 26
- The 3 Biggest Misconceptions About Dividend Stocks8 of 26
- Dividend Yield: Meaning, Formula, Example, and Pros and Cons9 of 26
- Forward Dividend Yield: Definition, Formula, vs. Trailing Yield10 of 26
- Dividend Rate vs. Dividend Yield: What’s the Difference?12 of 26
- Dividend Payout Ratio Definition, Formula, and Calculation13 of 26
- Ex-Dividend: Meaning and Date14 of 26
- Make Ex-Dividends Work for You15 of 26
- Record Date vs. Ex-Dividend Date: What's the Difference?16 of 26
- How and When Are Stock Dividends Paid Out?17 of 26
- How Dividends Affect Stock Prices With Examples18 of 26
- What Causes Dividends Per Share to Increase?19 of 26
- How Can I Find Out Which Stocks Pay Dividends?20 of 26
- Dividend Growth Rate: Definition, How to Calculate, and Example21 of 26
- Unpaid Dividend: What it is, How it Works, Example22 of 26
- 4 Ratios to Evaluate Dividend Stocks23 of 26
- How to Use the Dividend Capture Strategy24 of 26
- How Mutual Funds Pay Dividends25 of 26
- Why Would a Company Drastically Cut Its Dividend?26 of 26
Related Terms
Treasury Stock (Treasury Shares): Definition, Use on Balance Sheets, and Example
Treasury stock is previously outstanding stock bought back from stockholders by the issuing company.
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Follow-on Public Offer (FPO): Definition and How It Works
A follow-on public offer (FPO) is an issuance of additional shares by a public company that is already listed on an exchange.
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Dividend Payout Ratio Definition, Formula, and Calculation
The dividend payout ratio is the measure of dividends paid out to shareholders relative to the company's net income.
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Issued Shares: Definition, Example, Vs. Outstanding Shares
Issued shares are the number of authorized shares sold to and held by the shareholders of a company.
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Ex-Dividend: Meaning and Date
Ex-dividend is a classification in stock trading that indicates when a declared dividend belongs to the seller rather than the buyer.
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Capital Stock: Definition, Example, Preferred vs. Common Stock
Capital stock is the number of common and preferred shares that a company is authorized toissue, and is recorded in shareholders' equity.
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