Last Updated: 29th Dec, 2025
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A stock dividend is a corporate action which involves providing its shareholders with additional shares instead of funds. This may be preferred by companies that don’t want to impact their cash reserves. Instead, they can use the shares to provide the benefits equivalent of the dividend amount. This article explains what is stock dividend meaning with an example and how it differs from cash dividends.
Understanding the Definition of Stock Dividend
Stock dividend is a process in which a company issues extra shares instead of cash to its shareholders. Based on a specific ratio, the company offers bonus shares to provide additional benefits to its investors. While the share price gets diluted, the total number of shares held increases. Companies that want to retain their cash for expansion or other purposes while providing dividends to their shareholders may choose this type of dividend.
Let us understand the meaning of stock dividend definition with an example. A company declares that it is going to give a 10% stock dividend. This means that if you own 50 shares of the company, you will get 5 extra shares. Therefore, your holdings will now have 55 shares of this company. Now the price of the share may increase or decrease, depending on the market perception.
What are the Different Types of Dividends?
The dividend types may differ depending on how the company distributes its gains to their shareholders. Four common types of dividends are as follows.
- Cash Dividend: This may be a preferred form where shareholders receive cash per share owned. This dividend provides liquidity and immediate value, though it may reduce the company’s available funds.
- Stock Dividend: In this type, shareholders receive additional shares instead of cash. This increases ownership without extra investment and allows the company to retain their cash. However, the market value of the extra shares may fluctuate after the dividend is disbursed.
- Final Dividend: This dividend is declared at year-end and completes the annual payout cycle after reviewing full-year performance. It may be larger than quarterly dividends and reflects overall financial results.
- Special Dividend: This is an irregular and one-time payment that is provided in addition to the regular dividends. It may be issued when the company’s earnings are relatively higher than the expectations.
What is the Purpose of a Stock Dividend?
Both investors and companies may benefit from stock dividends in the share market. Some of the other purposes of stock dividends are as follows.
Preserving Liquidity
Companies can provide additional benefits to their shareholders for their loyalty without disturbing their cash reserves. On the other hand, shareholders get additional shares without investing any more capital.
Positive Market Sentiment and Improved Liquidity
When a company issues stock dividends, it may be considered to have positive financial health. Additionally, an increase in the number of shares increases their circulation, which may result in higher trading volume.
Difference Between Stock Dividend and Cash Dividend
There are differences between a stock dividend and a cash dividend. Some of them are as follows.
Stock Dividend | Cash Dividend |
Additional shares are issued | A dividend is issued in the form of cash |
Does not have an impact on the cash flow of the company | Reduces the company’s cash reserves |
The number of shares in the investor’s portfolio increases | Income is received in the form of cash |
The price of the stock may be adjusted after the company issues a stock dividend | The stock price may increase or decrease depending on other market conditions |
Tax is not levied until the investor sells the shares | Cash dividend is considered as income and thus taxed according to the investor’s income level. |
Dividend Payout Ratio vs. Dividend Yield
The difference between dividend payout ratio and dividend yield are as follows.
Criteria | Dividend Payout Ratio | Dividend Yield |
Definition | Percentage of net earnings paid out as dividends | Percentage return on investment based on current share price |
Formula | (Dividends per Share ÷ Earnings per Share) × 100 | (Annual Dividends per Share ÷ Market Price per Share) × 100 |
Focus Area | Measures how much profit is distributed vs. retained | Measures income return relative to share price |
Investor Insight | Indicates company’s dividend policy and sustainability | Indicates attractiveness of stock for income-focused investors |
Use Case | Useful for analysing dividend stability and earnings retention | Useful for comparing income potential across stocks |
Implication of High Value | May suggest generous payouts or low reinvestment | May suggest high income potential or undervaluation |
Stock Dividend vs. Bonus Dividend
Here’s a comparison between stock dividends and cash dividends:
Aspect | Stock Dividends | Cash Dividends |
Form of Payment | Paid in the form of additional shares | Paid in actual money |
Cash Outflow | Helps the company retain cash | Involves direct cash outflow from reserves |
Investor Preference | Long-term investors seeking to increase holdings | Investors looking for regular income |
Impact on Ownership | Increases number of shares held, but ownership percentage remains unchanged | Does not affect the number of shares held |
Tax Treatment | May have deferred or no immediate tax implications depending on jurisdiction | Usually taxable in the year received |
Effect on Share Price | May reduce share price proportionally due to increased supply | Often leads to a drop equal to the dividend amount on the ex-dividend date |
Factors that Influence Stock Dividends
The company’s decision to offer benefits to its shareholders in the form of stock dividends depends on several external and internal factors.
- If the company’s earnings are steady, it might prefer to issue dividends
- If the company required cash to fund growth, it may prefer stock dividends
- When the company wants to retain investor interest with regular dividends.
A company board’s decision to issue stocks as dividends can also be based on other factors specific to its business, financial and compliance requirements.
Calculation of Dividends
Understanding how dividends are calculated helps investors evaluate a company’s financial strength and how much profit it shares with its shareholders.
The dividend payout ratio is one of the most common metrics used. It shows what portion of a company’s net income is distributed as dividends.
Formula:
Dividend Payout Ratio = Dividends Paid / Net Income
- If a company doesn’t issue dividends, its payout ratio is 0%.
- If a company distributes all its net income as dividends, the payout ratio becomes 100%.
Another related metric is the retention ratio, which highlights how much profit the company keeps for future growth.
Formula:
Retention Ratio = (Earnings per Share – Dividend per Share) / Earnings per Share
These ratios help investors understand two things clearly:
- How much funds the company returns to shareholders, and
- How much it reinvests to expand operations, reduce debt, or build financial reserves.
The dividend payout ratio also signals long-term sustainability.
- A ratio above 100% means the company is paying more than it earns, which is unsustainable and may lead to dividend cuts.
- A stable payout ratio, on the other hand, indicates strong and consistent financial health.
Tax Implications of Stock Dividends
When an investor receives dividends in the form of stocks, it will not be taxed. However, capital gains tax is applied when the shares are sold based on:
- How long were the shares held
- Sale value of the shares.
How Do Stock Dividends Impact Investors?
When a company issues stock dividends, it impacts investors in several ways.
- Investors acquire more shares without having to invest additional capital
- These shares may lead to higher potential gains over time
- The adjustment in share price after the dividend is issued may provide investors with a chance to potentially increase their holdings in the company.
Conclusion
In a stock dividend, a company distributes additional shares to shareholders instead of cash. A company chooses this type when it wants to provide its shareholders with the benefits while retaining their cash reserves. It can also lead to a favourable market sentiment for companies. Moreover, investors gain shares at no cost. Hence, knowing what are dividends in share market, its purpose and how it differs from cash dividends may help individuals make investment decisions.
