What Happens to Dividends After a Stock Split?
When a company decides to issue a stock split (or stock dividend), any upcoming cash dividends can be affected in a couple of ways. In most cases, the dividend will be adjusted along with the share price. The factors to consider are the date of the stock split and the time of the cash dividend's record date.
- A stock split happens when a company divvies up its current shares into multiple shares, which lowers the price of the individual stock while increasing the number of outstanding shares.
- A stock split does not reduce the total dollar value of all outstanding shares, nor does it cause an investor to lose money; it merely increases the number of shares outstanding, boosting liquidity.
- A dividend, or cash payment made periodically by a company, is impacted by a stock split depending on the dividend's date of record, or the date on which one must be a shareholder to receive a dividend.
- If the stock split happens after the date of record, then the dividend is paid out as normal and there is no impact on the payout.
- If the stock split happens before the date of record then the dividend's total dollar value will stay the same, but the per-share price will be adjusted to reflect the increased number of shares after the stock split.
Stock Splits After the Record Date
A stock split is an action taken by a company to divide its existing shares into multiple shares. For instance, if a stock is trading at $100 per share and the company initiates a two-for-one stock split, a holder of 100 shares before the split will hold 200 shares at $50 per share after the split. The split is cosmetic in nature and does not affect the value of the holdings.
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 were purchased after the dividend's record date.
For example, suppose XYZ Corp. has set aside $2.5 million and plans to pay 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 number of dividends issued.
For example, suppose that XYZ Corp has set aside $2.5 million and plans to pay a quarterly $2.50 dividend on December 8 to all of its shareholders on record as of December 1, when there are initially one million shares outstanding. But the board of directors authorized a stock split on November 31, meaning the holders of the one million shares outstanding will now be the holders of two million shares outstanding. As a result, 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. The shareholders still receive the same dividend payout they would have before the stock split; it's just split because the shares were doubled.
Typically, to avoid complication, a company will not issue dividends and split its 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.