Definition: A stock dividend is a distribution of corporate shares to shareholders based on their ownership percentage in lieu of cash payments. In other words, it’s a payment of additional shares, instead of cash, to shareholders as a form of return on their investment in the company.
What Does Stock Dividend Mean?
Corporations typically issue stock distributions to investors for a variety of reasons. Many companies don’t have the cash to pay investors cash dividends, but they still want to encourage shareholders to keep their money invested in the company. Thus, the corporation gives each shareholder additional shares of stock based on their current ownership percentage, instead of cash. This way the shareholders receive a return on their investment and the corporation doesn’t have to part with its cash.
Since no cash is involved in a stock distribution, the assets and equity accounts are not affected by the transaction. The equity account is simply increased by the amount of shares issued to investors and decreased by the amount of the dividend given to each shareholder resulting in net zero effect.
These dividends follow the same timeline as a standard cash dividend: date of declaration, record, and payment. First, the board of directors declares that they will issue a payment to shareholders. Second, a record is created of the stockholders on that date. Third, new shares are issued to the previously recorded shareholders.
Unlike cash distributions, share dividends are reported two different ways depending on the number of shares being issued. A small stock dividend is a distribution of 25 percent or less of the previously outstanding shares and is accounted for by capitalizing the fair market value of the newly issued shares. A large stock dividend is a distribution of more than 25 percent of the outstanding shares and is accounting for by capitalizing the minimum legal value of the newly issued shares. This could either be the par value or stated value per share.