Stock Dividend Accounting What Is Essay

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If the board of directors approves a 10% stock dividend, each stockholder will get an additional share for each 10 shares held. "A stock dividend does not involve cash. Rather, it is the distribution of more shares of the corporation's stock. Perhaps a corporation does not want to part with its cash, but wants to give something to its stockholders. If the board of directors approves a 10% stock dividend, each stockholder will get an additional share for each 10 shares held" (Stock splits and stock dividends, 2012, Accounting Coach). It can be thus viewed as a kind of 'creative' way of rewarding shareholders and holding on to necessary cash. The company may be cash-poor because it wishes to invest more heavily in R&D, to engage in efforts to expand the company, or to deal with the costs of a merger, acquisition, or some other form of internal or external instability.

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As with a stock split, however, the value of the corporation will decrease in value after since the company value has remained constant but there are more outstanding shares. It might be asked: how is a stock dividend, as opposed to cash, favorable for the investor? If the investor does not want to part with the stock, a dividend may be preferable because of the lack of tax consequences. "If dividends paid are in the form of cash, those dividends are taxable. When a company issues a stock dividend, rather than cash, there usually are not tax consequences until the shares are sold" (What is a stock dividend, 2012, Investor Words). Profits can be released to shareholders in the combined form of both cash (taxable) and stock dividends (not taxable until sold)......

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