Stock Dividend - uSMART Singapore

I. What Is a Stock Dividend?

A stock dividend is a dividend payment to shareholders that is made in shares instead of cash. The stock dividend has the advantage of rewarding shareholders without reducing the company's cash balance.

These stock distributions are generally made as fractions paid per existing share. If a company issues a stock dividend of 5%, it is required to provide 0.05 shares for every share owned by existing shareholders. The owner of 100 shares would gain five additional shares.

KEY TAKEAWAYS

A stock dividend is a dividend paid to shareholders in the form of additional shares in the company.
Stock dividends are not taxed until the shares granted are sold by their owner.
Like stock splits, stock dividends dilute the share price, but as with cash dividends, they also do not affect the value of the company.

II. How Do Stock dividends Work?

Also known as a "scrip dividend," a stock dividend is a distribution of shares to existing shareholders instead of a cash dividend. This type of dividend may be made when a company wants to reward its investors but doesn't have spare cash or chooses to preserve cash for other investments.

Stock dividends have a tax advantage for the investor. The share dividend, like any stock share, is not taxed until the investor sells it.

A stock dividend may require that the newly received shares not be sold for a certain period. This holding period on a stock dividend typically begins the day after it is purchased.

III. Understanding：Dilution Effect

The board of a public company may approve a 5% stock dividend. That gives existing investors an additional share of company stock for every 20 shares they already own. However, this means that the pool of available stock shares in the company increases by 5%, diluting the value of existing shares.

Therefore, an investor who owned 100 shares in a company will own 105 shares once the dividend is executed, but the total market value of those shares remains the same. In this way, a stock dividend is similar to a stock split.

IV. Example of Stock dividends

If a company issues a 5% stock dividend, it would increase the number of shares held by shareholders by 5%, or one share for every 20 owned. If there are one million shares in a company, this would translate into an additional 50,000 shares. A shareholder with 100 shares in the company would receive five additional shares.

Unlike a cash dividend, a stock dividend does not increase the value of the company. If the company was priced at $10 per share, the value of the company would be $10 million. After the stock dividend, the value will remain the same, but the share price will decrease to $9.50 to adjust for the dividend payout.