Stock Dividend: What It Is and How It Works, With Example (2024)

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.

Stock Dividend: What It Is and How It Works, With Example (1)

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.

AccountDebitCredit
Stock dividends250,000
Common stock dividend distributable50,000
Paid-in capital in excess of par-common stock200,000

When the company distributes the stock dividend, it can make the journal entry:

AccountDebitCredit
Common stock dividend distributable50,000
Common Stock50,000

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.

AccountDebitCredit
Stock Dividends150,000
Common stock dividend distributable150,000

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.

  1. Internal Revenue Service. "Publication 550: Investment Income and Expenses." Page 22.

  2. 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

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.

more

Retained Earnings in Accounting and What They Can Tell You

Retained earnings are a firm’s cumulative net earnings or profit after accounting for dividends. They’re also referred to as the earnings surplus.

more

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.

more

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.

more

Bonus Issue of Shares Explained: How They Work

A bonus issue is an offer of free additional shares to existing shareholders.

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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.

more

Related Articles
How Dividends Affect Stockholder Equity Ex-Dividend Date vs. Date of Record: What's the Difference? Dividend Payout Ratio Definition, Formula, and Calculation Retained Earnings in Accounting and What They Can Tell You Issued Shares: Definition, Example, Vs. Outstanding Shares How Do Dividend Distributions Affect Additional Paid-In Capital?

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Stock Dividend: What It Is and How It Works, With Example (2024)

FAQs

Stock Dividend: What It Is and How It Works, With Example? ›

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.

What are stock dividends and how do they work? ›

A dividend is a reward paid to the shareholders for their investment in a company's equity, and it usually originates from the company's net profits. For investors, dividends represent an asset, but for the company, they are shown as a liability.

What are some examples of dividend paying stocks? ›

20 high-dividend stocks
CompanyDividend Yield
Eagle Bancorp Inc (MD) (EGBN)8.80%
Alexander's Inc. (ALX)8.61%
First Of Long Island Corp. (FLIC)8.27%
Evolution Petroleum Corporation (EPM)8.26%
17 more rows

How do you calculate a stock dividend example? ›

For example, let's say you purchase 100 shares of preferred stock. This stock has a par value of $35 and a dividend percentage of 5.5%. The annual preferred dividend per share is $1.92. To find the quarterly preferred dividend, you can divide this number by 4, which equates to $0.48 per share.

How do dividend stocks make money? ›

Here's an explanation for how we make money . A dividend stock is a publicly traded company that regularly shares profits with shareholders through dividends. These companies tend to be both consistently profitable and committed to paying dividends for the foreseeable future.

How long do you need to own a stock to receive a dividend? ›

The ex-dividend date is the first day the stock trades without its dividend, thus ex-dividend. If you want to get the dividend payment, you need to own the stock by this day. That means you have to buy before the end of the day before the ex-dividend date to get the next dividend. In other words, it's the cut-off date.

How do you know if a stock pays dividends? ›

Many stock brokerages offer their customers screening tools that help them find information on dividend-paying stocks. Investors can also find dividend information on the Security and Exchange Commission's website, through specialty providers, and through the stock exchanges themselves.

Can you live off dividends? ›

Living off dividends is a financial strategy that appeals to those aiming for a reliable income stream without tapping into their investment principal. This approach has intrigued many investors, from early-career individuals to those nearing retirement.

Do you pay taxes on dividends? ›

Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.

Is Coca-Cola a dividend stock? ›

The Coca-Cola Company's ( KO ) dividend yield is 3.22%, which means that for every $100 invested in the company's stock, investors would receive $3.22 in dividends per year. The Coca-Cola Company's payout ratio is 74.22% which means that 74.22% of the company's earnings are paid out as dividends.

What is an example of a dividend amount? ›

For example, if a company has a $20 share price and pays a dividend of $1 per year, its dividend yield would be 5%. If a company's dividend yield has been steadily increasing, this could be because they are increasing their dividend, because their share price is declining, or both.

How often are dividends paid? ›

Dividends are typically paid on a quarterly basis, though some pay annually, and a small few pay monthly. Companies that pay dividends are usually more stable and established, not those still in the rapid growth phase of their life cycles.

What is a good dividend yield? ›

What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.

How much to make $1,000 a month in dividends? ›

In a market that generates a 2% annual yield, you would need to invest $600,000 up front in order to reliably generate $12,000 per year (or $1,000 per month) in dividend payments. How Can You Make $1,000 Per Month In Dividends?

How much to make $1,000 a year in dividends? ›

At recent prices, shares of Altria Group (NYSE: MO), Ares Capital (NASDAQ: ARCC), and AT&T (NYSE: T) offer an average yield of 8.5%. This means you can secure $1,000 of annual-dividend income by investing about $11,765 spread evenly among them.

How much tax do you pay on stock dividends? ›

Your “qualified” dividends may be taxed at 0% if your taxable income falls below $44,625 (if single or Married Filing Separately), $59,750 (if Head of Household), or $89,250 (if (Married Filing Jointly or qualifying widow/widower) (tax year 2023). Above those thresholds, the qualified dividend tax rate is 15%.

What happens when you receive a stock dividend? ›

Dividends typically are credited to a brokerage account or paid in the form of a dividend check. The dividend check is mailed to stockholders but can be direct-deposited to a shareholder's account of choice, if preferred. The alternative to cash dividends is additional shares of stock.

What is a stock dividend for beginners? ›

Because dividends are paid out of a company's profits to shareholders, the ex-dividend date is when the stock begins trading without the value of those profits factored into its share price. As a result, a dividend stock's share price typically drops by the amount of the dividend payment on the ex-dividend date.

What is the difference between a stock split and a stock dividend? ›

Stock dividend means distribution of additional shares of own stock to stockholder without any payment in return. Stock split is the distribution of additional shares more than one new share in exchange for each one existing share.

Do you have to pay taxes on your dividends? ›

How dividends are taxed depends on your income, filing status and whether the dividend is qualified or nonqualified. Qualified dividends are taxed at 0%, 15% or 20% depending on taxable income and filing status. Nonqualified dividends are taxed as income at rates up to 37%.

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