A stock split is an action taken by a company to divide its existing shares into multiple shares in an attempt to boost the liquidity of the shares. Liquidity provides flexibility for investors to buy and sell shares in the company without making too great an impact on the share price.
When a company decides to issue a stock split (or stock dividend), a couple of possibilities could occur concerning what would happen to an upcoming cash dividend. The most important factors are the time the stock split happens and the time of the cash dividend's record date.
Stock Splits After the Record Date
Typically, a cash dividend will not be issued to new shares that were created from a stock split if the split date occurs after the dividend's date of record. This is similar to how an investor does not receive dividends for stocks that he purchased after the dividend's record date.
For example, suppose XYZ Corp. has set aside $2.5 million plans to pay out a $2.50 dividend on December 8 to all of its shareholders on record as of December 1 where there are one million shares outstanding. Furthermore, the stock is planning to have a two-for-one stock split on December 6. Since the split happens five days after the record date, all those newly created shares will not be eligible for the dividend on December 8.
Stock Splits Before the Record Date
As for situations when the stock split occurs before a dividend record date, the dividend will for the most part be paid out for the newly created shares as well. Except that the dividend likely will be split compared to previous time periods. This is due to the fact that companies want to maintain the amount of dividends issued.
For example, suppose that ABC Corp has originally set aside $2.5 million and plans to pay out its quarterly $2.50 dividend on December 8 to all of its shareholders on record as of December 1 that own the one million shares outstanding. Since the board of directors authorized a stock split on November 31, the company will be taking the $2.5 million and then issuing a $1.25 dividend to the holders of its two million shares outstanding.
Typically, to avoid complication, a company will not issue dividends and split their stock around the same time. Effectively though, in situations where a dividend and a split occur, the shareholders who hold throughout this period will be paid the same amount in total dividends whether there was a split or not.
(To learn more about stock splits, see Understanding Stock Splits.)