Investors in a community are known explicitly as stockholders. As the company’s owners, they typically receive two types of dividends: cash dividends and stock dividends. It is easy to mistake stock dividends for stock splits, but they are different.
|The goal of a stock split is to make the business stock more affordable to small retail investors and to boost market liquidity. It can attract new investors in this manner.
A stock dividend is a dividend payment delivered to shareholders in the form of stock rather than cash. The stock dividend provides the benefit of paying shareholders without depleting the company’s cash reserves. These stock distributions are often provided in the form of fractions paid per existing share. If a firm declares a 5% stock dividend, it must give 0.05 shares for every share owned by existing shareholders.
A stock split is performed to increase liquidity and make shares more accessible to diverse investors who could not previously purchase shares of that firm owing to excessive pricing. When a corporation declares a stock split, the number of shares issued increases, but the market cap stays unchanged. The price per share decreases as the number of shares grows. Existing shares were split, but the fundamental value remained unchanged.
Stock Dividend vs. Stock Splits
Shares dividends are paid out of distributable equity in the form of stock. On the other hand, Stock Split is another action the corporation takes in which the number of shares held by a shareholder is multiplied. In this case, the corporation does not issue new shares; instead, the existing shares are split or divided in a specific ratio.
The distinction between a stock dividend and a stock split is that a stock dividend is delivered to shareholders as equity stocks. In contrast, a stock split is simply the division of equity equities.