Stock Dividends: 5 Key Things To Know

If you are a stock market investor, whether novice or seasoned, you are familiar with what is dividends in share market. However, most investors consider only cash or cash equivalents to be dividends. Did you know that a dividend in the stock market can even take the form of shares? 

Do not be mindful, even if you were unaware. In this article, we’ve covered everything from the fundamentals to the advanced information on dividends, from what a dividend means in the share market to how to calculate them and how they work.

What Is a Stock Dividend?

Companies can give stock dividends to their shareholders as a non-cash benefit. Instead of distributing cash, the company issues new shares of stock to its existing shareholders in proportion to their holdings.

This form of a dividend in the share market increases the number of shares outstanding but does not change the company’s total value or market capitalization.

Stock dividend in share market is usually expressed as a percentage of the current shares. For example, if a company declares a 10% stock dividend, it means that for every 10 shares a shareholder owns, they will receive an additional share. The new shares are typically distributed on a specific date, known as the payment date. 

What Is an Example of a Stock Dividend?

Let’s review an example to understand how dividend in share market works. Suppose you own 1,000 shares of Tata Steel Ltd that have a dividend yield of 3-5% in the last year, making it one of the highest dividend-paying stocks in India. The current market price of Tata Steel is Rs 139.60 as of 29th Dec 2023.  So, your investment value is Rs 139,600.

On December 30, 2023, Tata Steel declared a 10% stock dividend, payable on January 15, 2024. You will receive one additional share for every 10 shares you own. On the payment date, you will receive 100 new shares of Tata Steel, increasing your total number of shares to 1,100.

The share price of Tata Steel will adjust accordingly, dropping to Rs 126.91 per share. The total value of your investment will remain the same at Rs 139,600. However, your average cost per share will decrease from Rs 139.60 to Rs 126.91

If Tata Steel pays a cash dividend of Rs 3.60 per share in the future, you will receive Rs 3960 in cash instead of Rs 3600 before the stock dividend.

How Do Stock Dividends Work?

In our journey to explore dividends in the share market, we have understood what share market dividend means. So, now we will head towards understanding how a stock dividend works?

A stock dividend is a distribution of additional shares of a company to its existing shareholders based on their current ownership. It is a way for the company to reward its investors without using its cash resources.

When a company declares a stock dividend, it announces the percentage of new shares issued to the shareholders. For example, a 10% stock dividend means that for every 10 shares a shareholder owns, they will receive one new share. The new shares are usually distributed on a specified date, called the payment date.

The total value of the company and the shareholders’ investment does not change after a stock dividend. Here is another fascinating concept of stock dividend dilution.

Simply put, stock dilution in the context of dividends in the share market occurs when the number of outstanding shares decreases, and the share price adjusts accordingly. The share price falls proportionately to the stock dividend percentage, resulting in the same market capitalization. The shareholders’ average cost per share falls due to owning more shares at a lower price.

Advantages and Disadvantages of Stock Dividends for Investors

Advantages	Disadvantages
They increase the number of shares owned by the shareholders without any cost.	They dilute the earnings per share and the ownership percentage of the existing shareholders.
They lower the average cost per share and potentially increase future returns.	They do not provide any immediate cash income to the shareholders.
The tax liability on them arises only when the shares are sold.	They may reduce the demand and liquidity of the shares, as the share price drops and the supply increases.
They allow the shareholders to increase their ownership stake in the company.	They may require additional administrative and transaction costs.
They signal the company’s confidence in its future growth and profitability.	They may limit the company’s growth, as it retains less earnings for reinvestment.

Pros and Cons for Companies

Here, we will understand “what is share market dividend” for companies-

Pros for Companies	Cons for Companies
They can preserve their cash flow and liquidity by choosing stocks over cash dividends.	They have to dilute their earnings per share and ownership percentage
They can signal their confidence in future growth and profitability.	They may limit their growth potential by retaining less earnings.
They can attract new investors who prefer a stable income.	They may limit their growth potential by retaining less earning

Journal Entry: Small and Large Stock Dividends

Let us understand the concept of journal entry in stock dividends.

The accounting for stock dividends in the share market depends on whether they are small or large. The market value of the shares is used to calculate the reduction of retained earnings and the increase in paid-in capital for small stock dividends. The par value of the shares is used instead for significant stock dividends.

The journal entries for stock dividends in the share market are made on the declaration and distribution dates. The company communicates the dividend to its shareholders on the declaration date. The distribution date is when the company issues the new shares to its shareholders.

To sum up, a small stock dividend is less than 20% to 25% of the total number of shares outstanding. A large stock dividend is more than 20% to 25% of the total number of shares outstanding. You can go through the table below to understand the journal entries for small and large stock dividends in share market:

Small Stock Dividend Accounting

Declaration Date

Account	Debit	Credit
Stock Dividends	Market Value of shares issued	–
Common stock dividend distributable	–	The par value of shares issued
Paid-in Capital over par	–	Difference between market value and par value

Distribution Date

Account	Debit	Credit
Common stock dividend distributable	The par value of shares issued	–
Common Stock	–	Par value of shares issued

Illustration of Small Stock Dividend Accounting

Let’s assume ABC has 10,000 shares of common stock outstanding, with a par value of INR 10 per share. The market value of each share is INR 50. The company declares a 10% stock dividend on December 1, 2023, and distributes the new shares on December 31, 2023.

Since the stock dividend is less than 20% to 25% of the total number of shares outstanding, it is considered a small stock dividend. Therefore, the market value of the shares is used to measure the reduction of retained earnings and the increase of paid-in capital.

Declaration date (December 1, 2023):

Account	Debit	Credit
Stock Dividends	Rs. 50,000	–
Common stock dividend distributable	–	Rs. 10,000/-
Paid-in Capital over par	–	Rs. 40,000/-

Distribution date (December 31, 2023):

Account	Debit	Credit
Common stock dividend distributable	Rs. 10,000/-	–
Common Stock	–	Rs. 10,000/-

Large Stock Dividend Accounting

Declaration Date

Account	Debit	Credit
Stock Dividends	Par value of shares issued	–
Common stock dividend distributable	–	par value of shares issued

Distribution Date

Account	Debit	Credit
Common stock dividend distributable	The par value of shares issued	–
Common Stock	–	Par value of shares issued

Illustration of a Large Stock Dividend Example

Let’s assume that XYZ has 10,000 shares of common stock outstanding, with a par value of INR 10 per share. The market value of each share is INR 50. The company declares a 30% stock dividend on December 1, 2023, and distributes the new shares on December 31, 2023.

Since the stock dividend is more than 20% to 25% of the total number of shares outstanding, it is considered a large stock dividend. Therefore, the par value of the shares is used to measure the reduction of retained earnings and the increase of paid-in capital.

The journal entries for XYZ are as follows:

Declaration Date

Account	Debit	Credit
Stock Dividends	Rs. 30,000/-	–
Common stock dividend distributable	–	Rs. 30,000/-

Distribution Date

Account	Debit	Credit
Common stock dividend distributable	Rs. 30,000/-	–
Common Stock	–	Rs. 30,000/-

What are the differences between receiving dividends in stock or in cash?

Features	Cash Dividend	Stock Dividend
Definition	The company distributes cash to its investors from its earnings as a cash dividend.	An increase in the number of shares of a company with the new shares being given to shareholders
Taxation	Taxable for the year in which they are received	Not taxable until the shares are sold
Effect on share price	The choice to keep or sell the new shares	Causes the share price to drop proportionally to the dividend ratio
Effect on Ownership	Does not change the ownership stake in the company	Increases the ownership stake in the company
Choice	No choice for the shareholder	Choice to keep or sell the new shares

The Bottom Line

In conclusion, stock dividends are a way for companies to reward their shareholders with additional shares of their stock. By the end of this article, you must have grasped well “What is dividend in share market.”

Not all stock dividends in the share market are the same. Depending on the size of the dividend, the accounting treatment and the effect on the share price may differ.

As a result, there is no universal answer to the question, “Is a stock dividend a good thing or a bad thing?” An investor must carefully weigh the pros and cons before deciding on stock dividends in the share market.