Next video:
Loading the player...

Cash dividends are paid to shareholders when a company decides not to use the money for operations, but instead, transfer economic value to its shareholders.

But the transfer causes a company’s share price to fall. For example, if a cash dividend equals 5% of a company’s stock price, shareholders will see their shares fall in value by 5%. Cash dividends provide income, but shareholders must pay taxes on them.

When a company issues a stock dividend, it gives new shares to its shareholders. Suppose XYZ Corporation issued 1 million shares. If it issues a 5% stock dividend, it will issue an additional 50,000 shares. An individual who owns 100 shares will receive five more.

Like a cash dividend, a stock dividend does not increase a company’s value. However, a shareholder can keep her shares and hope they grow, or sell some of the new shares to create her own cash dividend. Stock dividends also let shareholders avoid taxes. As long as they don’t come with a cash options, stock dividends are considered a better choice.

  1. No results found.
Related Articles
  1. Investing

    Why Dividends Matter

    Seven words that are music to investors' ears? "The dividend check is in the mail."
  2. Investing

    Due Diligence On Dividends

    Understanding dividends and how they work will help you become a more informed and successful investor.
  3. Investing

    Put Dividends to Work in Your Portfolio

    Find out how a company can put its profits directly into your hands.
  4. Investing

    Introduction To Dividends

    Investing in dividend-paying stocks can be an effective method of building long-term wealth.
  5. Investing

    Dividend Facts You May Not Know

    Discover the issues that complicate these payouts for investors.
  6. Investing

    The Top 5 Dividend Paying Oil Stocks for 2016

    Discover the top five dividend-paying oil companies for 2016 and what factors contribute to their ability to continue dividend payments.
Hot Definitions
  1. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  2. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. ...
  5. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability of potential investments.
  6. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
Trading Center