What is a Stock Dividend
A stock dividend is a dividend payment made in the form of additional shares rather than a cash payout. Companies may decide to distribute this type of dividend to shareholders of record if the company's availability of liquid cash is in short supply. These distributions are generally acknowledged in the form of fractions paid per existing share, such as if a company issued a stock dividend of 0.05 shares for each single share held by existing shareholders.
What Is A Dividend?
BREAKING DOWN Stock Dividend
Also known as a "scrip dividend," a stock dividend is a distribution of shares to existing shareholders in lieu of a cash dividend. This type of dividend arises when a company wants to reward its investors but either doesn't have the capital to distribute or it wants to hold onto its existing liquidity for other investments. Stock dividends also have a tax advantage in that they aren't taxed until the shares are sold by an investor. This makes them advantageous for shareholders who do not need immediate capital.
The board of a public company, for example, can approve a 5% stock dividend, which gives existing investors an additional share of company stock for every 20 shares they already own. However, this means that the pool of available equities increases by 5%, diluting the value of existing shares. Therefore, in this example, even though an investor who owns 100 shares in a company may receive 5 additional shares, the total market value of those shares remains the same. In this way, a stock dividend is very similar to a stock split.
Small Stock Dividends Versus Large Stock Dividends
When issuing a stock dividend, the total value of equity remains the same from both the investor's perspective and the company's perspective. However, all stock dividends require a journal entry on behalf of 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. The amount transferred between the two accounts depends on whether the dividend is a small stock dividend or a large stock dividend.
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 small stock dividend journal entry is made that transfers the market value of the issued shares from retained earnings to paid-in capital.
Large stock dividends arise when the new shares issued are more than 25% of the value of the total shares outstanding prior to the dividend. An associated journal entry is made to transfer the par value of the issued shares from retained earnings to paid-in capital.