Stock Dividend

A stock dividend is a payment to shareholders that is your share of a company’s profits. This payment is made in shares rather than as cash.

In doing so, this provides several advantages to companies, which can reward loyal shareholders without limiting its cash balance.

Most commonly, companies issue stock dividends as a fractional payment per existing share.

For example, if a company issues a stock dividend of 2.5%, this would require it to issue 0.025 shares for every share owned by existing shareholders.

As such, equates to 2.5 additional shares per 100 shares owned.

Why Stock Dividends Matter

Stock dividends vary by company. Some companies do not even have stock dividends, while others see different levels of dividends paid out.

Typically, dividends are paid out quarterly with the payment dates known ahead of time.

In less common situations such as certain companies in the United Kingdom, dividends are paid out on an annual basis.

Dividend stocks are advantageous for investors as they represent seemingly guaranteed payouts for owning shares. The most attractive dividend stocks are commonly older and more established companies.

Stock dividends also boast a tax advantage for the investor, especially in the United States. A dividend, like any stock share, is not taxed until an investor sells it.

Many companies opt not to offer stock dividends at all, which is hardly surprising.

For example, high growth companies such as fintechs or technology stocks avoid dividends, instead choosing to reinvest spare cash into research and development.

This can yield benefits for shareholders in other ways, such as enhancing existing products or creating new products that generate big sales, which by extension raise share prices.