What Are Stock Dividends?

What Are Stock Dividends?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Stock dividends are a portion of a company’s profits that are distributed to its shareholders. They are issued as additional shares of stock rather than cash. The number of shares a shareholder receives depends on the number of shares they already own. So, if a company declares a 10% stock dividend, shareholders will receive an additional share for every ten shares they own.

Related Questions

1. How are stock dividends different from cash dividends?

Cash dividends are a company’s earnings distributed to shareholders in cash form. Stock dividends, on the other hand, are earnings distributed as additional shares. Thus, stock dividends increase the amount of shares a shareholder owns, while cash dividends provide immediate income to shareholders.

2. Are all companies obligated to pay dividends?

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No, it’s not mandatory for all companies to pay dividends. The decision to pay dividends is made by a company’s board of directors, based on the company’s profitability and reinvestment needs.

3. What are the advantages of stock dividends?

Stock dividends can be advantageous to investors as they increase the number of shares owned, potentially leading to larger returns in the long run due to compounding. They are also tax-efficient as they are not taxed until the stocks are sold.

4. Can stock dividends be converted to cash?

Yes, stock dividends can be converted to cash, but not immediately. Shareholders will have to sell their extra shares in the stock market to convert them into cash.

5. Are stock dividends better than cash dividends?

Whether stock dividends are better than cash dividends depends on the investor’s financial goals. Those seeking immediate income might prefer cash dividends, while those looking to expand their holding or prepare for future gains may prefer stock dividends.