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Difference between Stock Dividend and Stock Split

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Generally, the dividend is provided by the company to its shareholders in two ways, either in cash or in additional stock. Stock dividend is a distribution of additional shares of a company’s stock to existing shareholders whereas a stock split is done to divide the existing shares into multiple shares. Stock Dividend and Stock Split may sound similar but have completely different meanings.

Difference between Stock Dividend and Stock Split

 

What is Stock Dividend?

A stock dividend is a distribution of additional shares of a company’s stock to existing shareholders. It is usually declared by the company’s board of directors and is paid out to shareholders in the form of additional shares, rather than cash. The number of shares received by each shareholder is typically proportional to their existing ownership percentage in the company. For example, if a shareholder owns 100 shares and the company declares a 10% stock dividend, the shareholder would receive an additional 10 shares.

What is Stock Split?

A stock split is a corporate action in which a company increases the number of outstanding shares by dividing its existing shares into multiple shares. The purpose of a stock split is to make the shares more affordable and increase their liquidity. The split is usually expressed as a ratio, such as 2-for-1 or 3-for-1, which means that each existing share is divided into two or three new shares, respectively. For example, if a company declares a 2-for-1 stock split, a shareholder owning 100 shares would receive an additional 100 shares but each share would be valued at half the amount of the original i.e. after the split, the two shares would be worth the same as one share the shareholder has started with.

Differences between Stock Dividend and Stock Split:

Basis

Stock Dividend

Stock Split

DefinitionDistribution of additional shares to existing shareholders.Division of existing shares into multiple shares.
PurposeProvide additional shares to shareholders.Increase affordability and liquidity of shares.
Nature of Share IssuedIssued as a dividend.Splitting existing shares.
Effect on OwnershipProportional increase in ownership for shareholders.Proportional increase in ownership for shareholders.
Dividend PaymentNo cash is paid to shareholders.No cash is paid to shareholders.
Impact on Stock PriceTypically results in a decrease in stock price due to dilution.It significantly impacts the stock price, stock price decreases according to the stock split ratio.
Accounting TreatmentTransfers from retained earnings to additional paid-in capital.No impact on retained earnings; par value per share may change.
Shareholder IncomeProvides additional shares but does not generate immediate income.Does not generate immediate income for shareholders.
Tax TreatmentGenerally considered taxable as ordinary income.Generally not considered taxable at the time of the split.
Voting RightsNo impact on voting rights.No impact on voting rights.
Fractional SharesMay result in fractional shares, which are rounded or paid in cash.No fractional shares, shares are divided into whole.
Market PerceptionOften seen as a positive signal of company performance.Generally viewed neutrally as a mechanical adjustment.
Perception of Stock ValueMay indicate management’s confidence in the company.May suggest a more affordable stock price.
Historical RecordkeepingRequires additional recordkeeping for dividend reinvestment plans.Does not typically require additional recordkeeping.
Shareholder ConcentrationDilutes existing shareholders’ ownership percentage.Does not impact existing shareholders’ ownership percentage.
Impact on Stock OptionsUsually results in adjusted stock options.Usually results in adjusted stock options.
Investor ExpectationsMay signal the company’s ability to generate future cash flows.May signal market demand and increase accessibility.
TimingCan be declared at any time, including outside of earnings season.Often announced along with earnings releases.

Last Updated : 02 Aug, 2023
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