What is a Stock Dividend?
A stock dividend, a method used by companies to distribute wealth to shareholders.
It is a dividend payment made in the form of shares instead of cash. They are primarily issued in place of cash dividends when the company is low on liquid cash on hand. The Board of Directors decides on when to declare a (stock) dividend and in what form the dividend will be paid.
Changing the par value per share
This can be done by issuing Stock Dividends
Par value per share does not change for any size stock dividend. Stock dividends are classified based on the number of new shares issued.
- Small stock dividends are those in which the new shares issued are no more than 20–25% of the current shares outstanding.
- Large stock dividends are stock dividends larger than 20–25% of the current shares outstanding.
While the stock price may drop with a small stock dividend, the decrease will be less than with a large stock dividend because of a smaller increase in the number of shares. This means that while a small stock dividend will not change the par value per share, it may not give a large decrease in market value
This means that the stock price will decrease more with a large stock dividend than with a small stock dividend because shares increase by a larger amount with a large stock dividend. Since par value per share does not change for any size stock dividend, this means that a large stock dividend will likely give a large decrease in market value without changing the par value per share.
Remember:
A stock split will increase the number of shares outstanding and decrease stock price. However, it also results in a decrease in par value per share.
A reverse stock split results in a decrease in the number of shares outstanding and an increase in par value per share. The likely result of fewer shares is an increase in stock price.
Also:
Under a stock dividend, retained earnings decrease because dividends of any kind result in a decrease in retained earnings. This is because a dividend returns capital to owners. At the same time, more shares of stock are issued with a stock dividend. This increases the total paid-in capital. The decrease in retained earnings is equal to the increase in paid-in capital.
Issuing stock never decreases total paid-in capital since more shares issued increases the amount invested by owners
Accounts Affected:
When a stock dividend is issued, it affects the following accounts:
Common stock, paid-in capital in excess of par — common stock, and retained earnings
Because a stock dividend occurs when an organization distributes additional shares of stock to existing stockholders as a dividend rather than paying them cash. For “small” stock dividends (less than 20–25% of the number of shares outstanding) retained earnings are reduced for the fair value of the stock being issued, common stock is increased for the par value of the stock issued, and the difference is included in additional paid-in capital. For “large” stock dividends (greater than 20–25% of the number of shares outstanding) retained earnings are reduced for the par value of the stock being issued and common stock is increased for the same amount. There is no impact on additional paid-in capital, similar to a stock split.
