Definition of a Stock Dividend
A stock dividend is a dividend consisting of additional shares of stock. Assume that before a corporation declares a stock dividend, it has 25,000 shares of common stock outstanding with each of its 25 stockholders holding 1,000 shares. After a 10% stock dividend, each stockholder will have 1,100 shares and the corporation will have 27,500 shares outstanding. This means that before and after the stock dividend, each stockholder owns 4% of the corporation (1/25 and 1.1/27.5). Basically, the corporation has not changed, it simply increased everyone's number of shares of stock proportionately.
Definition of a Cash Dividend
A cash dividend is a distribution of part of a corporation's cash. If a corporation has 25,000 shares of common stock outstanding and it declares and pays a cash dividend of $3 per share, the corporation will distribute $75,000 of its cash to the common stockholders. In addition to reducing the corporation's cash balance, it reduces the corporation's retained earnings , which is part of its stockholders' equity .
Reasons for a Stock Dividend
A corporation might issue a stock dividend instead of paying a cash dividend for the following reasons:
- To increase the number of shares of stock outstanding
- To reduce the market price per share of stock
- To transfer some of the corporation's retained earnings to paid-in capital
- To minimize distributing the corporation's cash to its stockholders
