A company distributes profit among shareholders so that the shareholders may be encouraged to remain invested in the company. This profit is called the dividend. Generally, a company distributes the dividends to its shareholders in two forms. One is cash dividend and the other is stock dividend. Cash dividend is distributed in the form of cash while the stock dividend is given in the form of stock.
In a stock split no additional stock is given to the shareholder in the form of dividend, but the existing stocks of the company is divided into a definite ratio and hence the number of stocks hold by the shareholder gets multiplied.
Stock Dividend
Stock dividends are given to the shareholders in the form of additional stocks. These may be given as a replacement to cash dividend or in addition to the cash dividend. Stock dividend is simply the issuing of additional shares of the company to its existing shareholders. It is important to remember that with the increase in outstanding shares, the earning per share dilutes which results in decrease in the value of share.
In general, the stock dividend is given as a bonus issue, i.e. reward to the shareholder. It means that extra shares are given to the shareholder free of cost. The number of extra shares allotted to the shareholders depends on the holdings of the shareholder in the company. The bonus issue is also called the capitalization issue.
Why the companies issue stock dividend?
Some reasons of issuing stock dividends by the company are listed as below:
- The stock dividends do not require cash. The management decides issuing stock dividends when it does not have sufficient cash for the dividends.
- The market price of the share is reduced when the stock dividend is issued hence it might look as an investment opportunity to many of the investors.
- Unlike the cash dividend, it does not showcase the taxable income to the recipients.
- The company satisfies stockholders without paying the cash.
Effect of Stock Dividend
- Since stock dividend results in increase in number of shares which subsequently cause decrease in Earnings Per Share (EPS), price per share and book value per share.
- It indicates the positive soundness and strong financial position of the company.
- It may result in decline in the price of the share but the market value of the company does not get affected due to this.
How Does It Benefit to the Investor?
Stock dividend increases the number of shares of the investor but at the same time it causes the dilution in the value of the stock. Let us consider that a company decides to give 10% stock dividend to its shareholders. It means that an investor initially holding 100 shares will now own 110 shares but the total market value of the shares will remain the same. This results in decrease in the value of the share. In this way, the stock dividend is similar to stock split.
Pros and Cons of Stock Dividends
| Pros | Cons |
| Company’s cash reserve does not get affected | The share value gets diluted |
| As the share price decreases, new investors may be interested to invest in the company | Cash income of the investors is sacrificed with the stock dividends |
| Stock dividends are not considered as taxable income for investors | It indicates that the company is short of cash |
Stock Split
Stock split simply means dividing one share into number of shares without changing the paid-up capital. It causes the decrease in the value of per share but the total number of shares of the shareholder gets multiplied. However, it does not have any impact on the equity or market capitalization of the company.
Stock split is a strategic move, in which the face value of the shares of company is divided into a fix ratio which eventually results in the increase in total number of shares of the company without impacting its market capitalization.
Why Does the Stock Split Happen?
When the market prices of a share go very high then it becomes difficult for investors to invest in the company. In this case, the company decides to split the share into many shares due to which the market price per share decreases. In this way the company makes its shares marketable and tries to attract new investors. However, the stock split does not cause decrease or increase in the market capitalization of the company.
Sometimes the company decides to split its stocks to conceal the distribution of large profits as with the stock split, the earnings per share decreases. Another reason for stock split is to make the investors happy.
Example:
Suppose an investor owns 20 shares of company ‘A’, which declares the stock split in the ratio of 1:10. The current share price is ₹ 200 per shares and the face value of the share is ₹ 100. After the stock split, the investor will now own 200 shares with the face value of ₹10. The stock that was traded for ₹200 initially will now be traded at ₹20 in the market.
Comparison Chart
| Feature | Stock Dividend | Stock Split |
| Increase in No. of Shares | The number of shares increase by the percentage of the stock dividend | The number of shares increase by a fraction |
| Objective | To distribute the earnings without paying cash to the shareholders | To make the share marketable and hence to attract the investors |
| Face value and market value | Face value remains the same but the market value decreases | Face value reduces in proportion to split ratio and the market value per share decreases |
| Who gets benefitted? | Existing shareholders | Existing shareholders and potential investors |
| Future dividend per share | Remains same since the face value remains unchanged | Decreases since the face value of the share decreases |
| Reason | A company declares stock dividend when do not have sufficient cash but it want to distribute earnings among the shareholders | When the market price of a share gets too high, the company decides to split it in a fixed ratio so that its market price may decrease and the investors may be attracted to invest in the company |
Conclusion
Stock dividend is aimed to distribute earnings to the shareholders of the company without paying the cash while the objective of stock split is to divide the stock into many parts so that its market price is reduced. In the stock dividend, the shareholders are paid additional stocks and hence the number of stock of the shareholder are increased while in the stock split no additional stocks are paid to the shareholder but the number of shares increase due to split of stock in a given ratio. You can see that while the objectives of stock dividend and stock split are different, the ultimate outcome is the increase in number of shares in both cases.
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