What are Stock Dividends?

A stock dividend is a dividend paid as additional shares of stock rather than cash. A stock dividend to common stock dividend owners distributes additional stock in the company to the common stock shareholders. Such dividends are evenly distributed to the shareholders depending on their portion of ownership in the corporation. Such distributions maintain their proportional ownership in the corporation. For instance, if the Board of Directors of a Company approves a 10% stock dividend, each stockholder will get an additional share for each 10 shares held. A stock dividend is also known as a "scrip dividend". Thus, a stock dividend does not involve cash. Rather, it involves the distribution of more shares of the Company's stock. Perhaps, a Company does not want to part with its cash, but wants to give something to its stockholders. However, when dividends paid are in the form of cash, they are taxable. Thus, when a Company issues a stock dividend, rather than a cash dividend, usually there are no tax consequences until the shares are sold. Companies pay dividends as a demonstration of financial health and as a way of increasing shareholder allegiance. However, not all companies pay dividends. Many firms keep their earnings and re-invest them in the business, reasoning that they can increase shareholder value more rapidly by fueling growth than by handing out cash. Firms opposed to dividends also argue that retaining earnings is a more tax-efficient strategy, since dividends are taxed as ordinary income, while any growth fueled by reinvesting earnings is generally taxed at more favorable long-term capital gains rates. However, Companies may even decide to distribute stock to shareholders of record if the company's availability of liquid cash is in short supply. These distributions are generally acknowledged in the form of fractions paid per existing share. An example would be a company issuing a stock dividend of 0.05 shares for each single share held.
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