Generally, the dividend is provided by the company to its shareholders in two ways, either in cash or in additional stock. Stock dividend is a distribution of additional shares of a company's stock to existing shareholders whereas a stock split is done to divide the existing shares into multiple shares. Stock Dividend and Stock Split may sound similar but have completely different meanings.
What is Stock Dividend?
A stock dividend is a distribution of additional shares of a company's stock to existing shareholders. It is usually declared by the company's board of directors and is paid out to shareholders in the form of additional shares, rather than cash. The number of shares received by each shareholder is typically proportional to their existing ownership percentage in the company. For example, if a shareholder owns 100 shares and the company declares a 10% stock dividend, the shareholder would receive an additional 10 shares.
What is Stock Split?
A stock split is a corporate action in which a company increases the number of outstanding shares by dividing its existing shares into multiple shares. The purpose of a stock split is to make the shares more affordable and increase their liquidity. The split is usually expressed as a ratio, such as 2-for-1 or 3-for-1, which means that each existing share is divided into two or three new shares, respectively. For example, if a company declares a 2-for-1 stock split, a shareholder owning 100 shares would receive an additional 100 shares but each share would be valued at half the amount of the original i.e. after the split, the two shares would be worth the same as one share the shareholder has started with.
Difference between Stock Dividend and Stock Split
Basis | Stock Dividend | Stock Split |
|---|---|---|
| Definition | Distribution of additional shares to existing shareholders. | Division of existing shares into multiple shares. |
| Purpose | Provide additional shares to shareholders. | Increase affordability and liquidity of shares. |
| Nature of Share Issued | Issued as a dividend. | Splitting existing shares. |
| Effect on Ownership | Proportional increase in ownership for shareholders. | Proportional increase in ownership for shareholders. |
| Dividend Payment | No cash is paid to shareholders. | No cash is paid to shareholders. |
| Impact on Stock Price | Typically results in a decrease in stock price due to dilution. | It significantly impacts the stock price, stock price decreases according to the stock split ratio. |
| Accounting Treatment | Transfers from retained earnings to additional paid-in capital. | No impact on retained earnings; par value per share may change. |
| Shareholder Income | Provides additional shares but does not generate immediate income. | Does not generate immediate income for shareholders. |
| Tax Treatment | Generally considered taxable as ordinary income. | Generally not considered taxable at the time of the split. |
| Voting Rights | No impact on voting rights. | No impact on voting rights. |
| Fractional Shares | May result in fractional shares, which are rounded or paid in cash. | No fractional shares, shares are divided into whole. |
| Market Perception | Often seen as a positive signal of company performance. | Generally viewed neutrally as a mechanical adjustment. |
| Perception of Stock Value | May indicate management's confidence in the company. | May suggest a more affordable stock price. |
| Historical Recordkeeping | Requires additional recordkeeping for dividend reinvestment plans. | Does not typically require additional recordkeeping. |
| Shareholder Concentration | Dilutes existing shareholders' ownership percentage. | Does not impact existing shareholders' ownership percentage. |
| Impact on Stock Options | Usually results in adjusted stock options. | Usually results in adjusted stock options. |
| Investor Expectations | May signal the company's ability to generate future cash flows. | May signal market demand and increase accessibility. |
| Timing | Can be declared at any time, including outside of earnings season. | Often announced along with earnings releases. |
Conlusion
Different goals are achieved and different impacts are observed since the issuing of extra shares to current stakeholders is experienced with both stock dividends and stock splits. However, the two are part of the activities of stock brokerage services. Thus, stock dividends represents an additional way investors can either increase their holding or receive returns on their investments while keeping them in papers of the given company. In addition, through stock dividends the stock price of equities tends to always go down due to dilution when officers distribute shares to their holders. Stock splits are carried out to raise stock liquidity and/or the stock price in order to make it more affordable and improve its tradability. Lack of understanding the fundamental variances existing between stock dividends and stock splits could result to investors and/or holders of such stocks becoming casualties of the dilutive impacts brought about by these corporate processes.