Stock Dividend vs Stock Split: Difference and Comparison

Let’s say a corporation declares a cash dividend of $0.25 per share. If an investor owns 10,000 shares, the investor https://www.bookstime.com/ would receive $2,500 as a cash dividend. Every corporation has the same goal in mind—to maximize shareholder wealth.

• A stock’s price may rise as its value increases to the point where certain investors are unable to purchase it.
• In addition to or instead of the cash dividend, stock dividends are paid.
• The main objection is that stock dividends are unnecessary if a company has enough cash to distribute to its shareholders.
• All references to per-share data and stock option data have been adjusted to reflect this stock split.

Stock dividends have a tax advantage for the investor as well. Like any stock shares, stock dividends are not taxed until the investor sells the shares. Last, there are implications for intentionally reducing the company’s share price. Public exchanges such as the NASDAQ require stock to trade at or above $1. Should a share price drop below $1 for thirty consecutive days, the company will be issued a compliance warning and will have 180 days to regain compliance.

Difference Between Stock Dividend and Stock Split

This means two shares now equal the original value of one share before the split. Neither stock splits nor stock dividends result in an increase in the shareholders‘ wealth. Stock splits are simply a realigning of the company’s number of outstanding shares, not the stock’s actual value. When a company declares a stock dividend, it must lower its stock price to balance the increase in the number of outstanding shares. In both cases, the company’s overall net worth in terms of assets compared to liabilities does not change.

The benefit to the shareholders comes about, in theory, because the split creates more attractive opportunities for other future investors to ultimately buy into the larger pool of lower priced shares. Large stock dividends are those in which the new shares issued are more than 25% of the value of the total shares outstanding before the dividend. In this case, the journal entry transfers the par value of the issued shares from retained stock split vs stock dividend earnings to paid-in capital. Both stock splits and stock dividends have the effect of increasing the number of outstanding shares of a company’s stock. If a company had 200,000 outstanding shares and declared a 5 percent stock dividend distribution, it would then have 210,000 shares outstanding. With a stock split, the size of the share increase will be determined by the type of split, such as two-for-one, three-for-one, and so on.

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In each circumstance, total stockholders‘ equity remains the same because there has been neither an increase nor a decrease in the entity’s net assets. When state law requires a transfer, under the circumstances of a split effected as a dividend there is no need to capitalize retained earnings, other than to the extent occasioned by legal requirements. The purpose of these activities is generally to stimulate activity in the stock by reducing the trading value of each share, with the ultimate goal of increasing the total value of the shares. Discover dividend stocks matching your investment objectives with our advanced screening tools. Helpful articles on different dividend investing options and how to best save, invest, and spend your hard-earned money. Finally, Best Buy has razor-thin margins, and it depends on selling sufficient inventory to keep up with debt that matures at the end of the year.