1

Dividends could be paid out to investors through cash dividends or stock dividends. In terms of the stock dividend, besides tax advantage when they don't sell out the shares compared to cash dividends, what are the other benefits from this?

Take an example (from Investopedia): if a company were to issue a 5% stock dividend, it would increase the number of shares by 5% (one share for every 20 owned). If there are one million shares in a company, this would translate into an additional 50,000 shares. If you owned 100 shares in the company, you'd receive five additional shares. This, however, like the cash dividend, does not increase the value of the company. If the company was priced at $10 per share, the value of the company would be $10 million. After the stock dividend, the value will remain the same, but the share price will decrease to $9.52 to adjust for the dividend payout.

So originally, you own: 100*$10= $1000 After stock dividends, you own: 105* $9.52= 999,6

The value is the same as well as your percentage ownership since everyone gets 5% stock dividends as well. Only the number of stocks you hold increases, then how does it matter?

Improve this question
5
  • If the company is doing well, the source of the dividends is replenished by future revenue. You haven't lost anything, only traded future capital gain for an immediate dividend.
    – chepner
    Oct 31, 2020 at 16:42
  • 2
    @chepner - It's a stock dividend so there is no reduction of assets and therefore no replenishment.
    – Bob Baerker
    Oct 31, 2020 at 18:13
  • Eh, the pool from which the stock is drawn is an asset.
    – chepner
    Oct 31, 2020 at 18:17
  • 2
    Eh, a stock dividend has the same effect on the value of a company (and the value of one's shares owned) as a stock split - none.
    – Bob Baerker
    Oct 31, 2020 at 18:20
  • Sounds like a fancy term for a fractional stock split.
    – Acccumulation
    Nov 3, 2020 at 4:23

3 Answers 3

Reset to default
1

besides tax advantage when they don't sell out the shares compared to cash dividends, what are the other benefits from this?

None. Given there are more shares the only other benefit is more shares to vote, but now there are more shares, so the voting "part" is not more significant.

The idea is that if you need money (i.e. a cash dividend) you can actually sell the new shares.

Improve this answer
0

Importance of a stock dividend? None. It doesn't matter.

At best, you could make a case that after a stock dividend then because you own more shares, the compounding effect could be greater.

A stock dividend doesn't affect total cost basis but since you now own more shares, your cost basis per share is lowered. So that means a bit of additional bookkeeping, a minor disadvantage.

Improve this answer
3
  • 1
    "At best, you could make a case that after a stock dividend then because you own more shares, the compounding effect could be greater." Huh?
    – Acccumulation
    Nov 3, 2020 at 1:31
  • 1
    No, if you have more shares because of stock dividends, then the dividend per share is less, and the total dividend is the same.
    – Acccumulation
    Nov 3, 2020 at 4:23
  • SPY return for the past 10 years: With dividends reinvested, +235.42%. Without dividends reinvested, +210.21%. Dividends provide compound gains if share price rises.
    – Bob Baerker
    Nov 3, 2020 at 13:26
-1

Dividends could be paid out to investors through cash dividends or stock dividends. In terms of the stock dividend, besides tax advantage when they don't sell out the shares compared to cash dividends, what are the other benefits from this?

A stock dividend is the combination of two:

  • Pay $X dividends
  • Sell Y shares to the one receiving $X dividends at a cost of $X

The only source of benefit for stock investors are dividends and dividend equivalents (share buybacks) minus issues of new shares. When calculating the total return of a stock, you need to consider all cash movements between the company and its investors. A company moving cash to its investors is a profitable one and a good investment, whereas a company needing all the time more cash for its operation is not a profitable one.

A stock dividend moves cash in equal amounts in both directions, so it has no effect on the total return.

Improve this answer

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .