Sunday Emmanuel

@sundayemmanuel · 11 Nov 2021

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what are dividend stocks

A stock dividend, a method that is used by companies to distribute wealth to the shareholders of the company, is a dividend payment that is made in form of shares instead of cash. The advantage of a stock dividend is that it rewards the shareholders without decreasing the company's cash balance, whilst it dilutes the earnings per share of each individual. Stock dividends are principally issued instead of cash dividends when the company is low on convertible assets at hand
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How a Stock Dividend Works

A stock dividend is also known as a "scrip dividend," a stock dividend is a distribution of shares to existing shareholders in preference to a cash dividend. This type of dividend is usually made when a company wants to reward its investors but doesn't have the spare cash or wants to conserve its cash for other investments.

What Is the Difference Between a Stock Dividend and a Cash Dividend?
While a stock dividend is made as payment in the form of company shares, a cash dividend is made as payment in form of cash. Most companies generally think stock dividends is more advantageous than cash dividends because it is not taxed.
Reason for which companies issue stock dividends
A company may issue a stock dividend if it has a limited supply of convertible assets. A company may also choose to issue a stock dividend if it is trying to conserve its existing supply of cash for other purposes. While issuing a stock dividend essentially reduces the value of the outstanding shares because it increases the total supply of stock, if the shares were to rise in price, this can be favorable for the stakeholders. Meanwhile, stock dividends are not taxed at all until they are sold, unlike cash dividends which are taxed.

Impact of a Stock Dividend on Market Capitalization
A stock dividend that is similar to a cash dividend does not increase stockholder wealth or market capitalization. Even though stock dividends increase the number of shares outstanding for a company, the price per share must decrease correspondingly. An understanding that the market capitalization of a company remains the same explains why share price must decrease if more shares are issued.

Advantages of a Stock Dividend

•    A company that does not have enough cash may choose to pay a stock dividend in preference to a cash dividend. By way of explanation, a cash dividend allows a company to keep its current cash position.
•    There are no tax considerations for issuing a stock dividend. And this being the case, shareholders generally believe that a stock dividend is superior to a cash dividend – a cash dividend is treated as income in the year received and is, therefore, taxed.
•    A stock dividend increases the number of shares whilst decreasing the share price correspondingly. By lowering the stock price through a stock dividend, a company’s merchandise may be more “affordable” to the public.
•    Stock dividends help secure a steady stream of income

Disadvantages of a Stock Dividend

•    The market may perceive a stock dividend as a shortage of cash, signaling financial problems. Market participants may believe the company is financially distressed, as they do not know the actual reason for management issuing a stock dividend. This can put selling pressure on the stock and depress its price.
•    Issuing a stock dividend instead of a cash dividend may be taken by the public that the company is using its cash to invest in risky projects. Hence the practice of stock dividends can cast doubt on the company’s management and subsequently depress its stock price.@Henkjan de Krijger#whatarestockdividend #howastockdividendwork #ImpactofaStockDividendonMarketCapitalization #AdvantagesofaStockDividend #DisadvantagesofaStockDividend