Question

What are stock dividends and stock splits? What are the advantages and disadvantages of stock dividends and splits? When should a stock dividend as opposed to a stock split be used?

Answer 1

The dividend (distribution of Profit to Equity shareholders) which is paid in the form of equity or shares instead of Cash is known as Stock Dividend.
Stock split is the issue of new shares in a company to existing shareholders in proportion to their current holdings.

Advantages of Stock Dividend:

1. It increases the Liquidity of Cash,
2. It increases the Liquidity of Shares in the market
3. It increases the investor interest in the company by giving Tax Benefits.

Disdvantages of Stock Dividend:

1. It increases over capitalization
2. It increases shareholders expectations from the company

Advantages of Stock Stock split:

1. It increases the liquidity of stock
2. A stock split is often seen as a positive indicator that a company is growing

Disdvantages of Stock Stock split:

1. Increase in volatility
2. New record keeping challange
3. Costs associated with split

The company should use a stock dividend instead of a stock split when the company wants to pay out dividend (to show the sound position of the company) but is low on cash.

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