Question

Explain the benefits of a stock dividend both to the corporation issuing the dividend and to the shareholder receiving the dividend. Use at least one Internet Resource.

Answer 1

A Stock dividend is a distribution of shares by a company to its existing shareholders without consideration. This effect in increasing the number of outstanding shares of the company.

For example, when a company declares 10% stock dividend and a shareholder owns 100 shares at the time, then he will receive 10 additional shares.

Benefits:

The stock dividend has advantage both to the company and to the shareholder.

To Company:

• The declaration of a stock dividend allows the company to declare a dividend without using cash which may be needed to finance the profitable investment opportunities withim the company.
• In some situation where company not retain earnings, the stock dividend is the only means to pay dividend to its shareholders and maintain the investor confidence in the company.
• Sometimes company declare the stock dividend to reduce the market price of the share and make more attractive to investors. Hence, it will increase the trading activity.

To Shareholders:

• One advantage to the shareholders who receive stock dividends is the tax benefit.The receipt of the stock dividend by the shareholder is not taxable as income. The payment of stock dividend is interpreted by shareholder as a signal of higher profitability.
• For long-term investor, a stock dividend can also be a way of reinvesting in a company which may grow and increase equity value in the future.
• If company following the policy of paying a fixed amount of stock dividend and continues it after the declaration of the stock dividend, the total cash dividends of the shareholders will increase in future. The declaration of stock dividend may have a favourable psychological impact on shareholders.