Definition: What are Stock Dividends?
The word “dividend” has its roots in the Latin word “dividendum” – meaning something that is to be divided and distributed.
Stock dividends are dividends that are issued (either whole or fractional) to shareholders of record at a specific date, and usually (but not necessarily) come out of the company’s profits earned in a period.
Stock dividends are much like periodic interest that a bank pays to its depositors who hold money with them (banks) in an interest-bearing account.
At a very basic level therefore, stock dividends may be thought of as a reward that a company gives to a stock holder for staying invested in the company.
How are Stock Dividends Paid?
While a bank pays interest regularly on its interest-bearing accounts, stock dividends are not necessarily guaranteed, and not all companies pay them.
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They are only paid if approved by the company’s Board of Directors.
Usually dividends are declared on a fixed schedule (monthly, quarterly, semi-annually or annually).
Key Additional Information
A key advantage of stock dividends is that they help companies to conserve their cash.
Instead of issuing Cash Dividends, a company will declare stock dividends at a pre-defined rate per stock held.
And since they are determined on a per stock basis, the disadvantage for shareholders is that the more stocks that a company issues as dividends, the less dividends existing shareholders will subsequently receive.
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