Common Stock Dividend

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Stock Dividend

 

What is a Stock Dividend?

Dividends are payments by a company to its shareholders. However, rather than paying in cash, the company distributes additional shares to its shareholders. Critically by doing so it increases the amount of issued shares.

 

Definitions

 

Definition 1

The event in which the directors of the corporation distribute a payment to shareholders in the form of shares of stock, as opposed to money, while increasing the number of shares.

 

Definition 2

A stock dividend is a payout of part of a company's profitsin proportion to the number of shares each shareholder owns, paid in the company's own shares rather than in cash. When a company pays a stock dividend the value of each share of stock is not altered, as it is in a stock split.

 

Definition 3

The reward an investor receives for investing in the company. The higher the dividend, the higher the reward.

 

Definition 4

A non-taxable payment from a company to its shareholders (as opposed to a cash dividend)

 

 

Why do companies pay stock dividends?

 

* For the company the main advantage is that when the company's cash position is inadequate for paying out cash dividends, they can pay their shareholders in shares.

* For both the investor as well as the company, another main advantage is that there are usually no tax consequences until the shareholder sells the shares. A cash dividend would be considered as income in the year it is received.

* The company might aim to increase liquidity of its shares by issuing more of shares and by doing so reducing the value of the shares (this is not always the case)

Stock Dividends Glossary

 

 

Declaring a Dividend

 

A Dividend is being Declared by the board of directors. There are legal guidelines as to what information needs to be made available (different per country).

 

Declaration Date

This is the date at which the board of directors announces how much the dividend is going to be, as well as what the record date and the payment date are going to be.

 

Record Date

This is the date used to determine to which shareholders to pay the dividend to. Because shares are being traded between shareholders continuously, a cut off date is needed which is called the record date. The dividend is being paid to the shareholder who holds the shares at the record date (which does not mean that he is actually entitled to it).

 

Ex (Dividend) Date

The Ex Date is the date at which the shares start trading WITHOUT the entitlement to the dividend. This means that an investor who purchases the shares on this date (and on that day will becomes the beneficial owner of the shares), will not be entitled to the dividend.

 

CUM Dividend Date

The Cum Dividend date is the date at which the shares end trading WITH the entitlement to the dividend. This means that an investor who buys the shares on this date (and on that day will become the beneficial owner of the shares), will be entitled to the dividend. 

 

Payment Date

This is the day on which the additional shares are acutally going to be delivered.

 

Dividend Yield (both for cash dividends as well as stock dividends)

The dividend yield is a ratio which shows how much a company pays in in dividends relative to its share price. Put differently: it is the annual dividend per share divided by the price per share.

For example; Company A's shares are trading at GBP 50 per share and Company B's shares are trading at GBP 100 per share. Both companies announce an annual divided of GBP 5 per share.

Dividend Yield = Annual Dividend per share / price per share.

Dividend Yield A = 5 / 50 = 0.10 = 10%

Dividend Yield B = 5 / 100 = 0.05 = 5%

An investor would prefer to buy shares in Company A.

 

Dividend Income (both for cash dividends as well as stock dividends)

There are two sides of Dividend Income:

1. Dividends are paid out of the income of corporations. Income of corporations is the revenues of the company minus the cost of sales, operating expenses and taxes over a given period of time. What is left is available for reinvestment and dividends.

2. Dividens themselves can be part of an individual's or entity's income. In that case an individual or an entity holds shares of (another) company and receives income in that way.

 

Dividend Payment

The actual payment of a dividend. Often the settlement of the additional shares takes place electronically via your bank.

 

Price per earnings ratio

A ratio that shows the valuation of the shares against the earnings per share (EPS) of the company

Put differently: it is the current price per share in the market divided by the Earnings of the Company per share (EPS).

 

For example:

For example; Company A's shares are trading at GBP 50 per share and Company B's shares are trading at GBP 100 per share. Both companies announce Earnings per share of GBP 5 per share.

 

Earnings per share ratio = Price per share / Earnings per share.

Earnings per share ratio A = 50 / 5 = 10

Earnings per share ratio B = 100 / 5 = 20

An investor is willing to pay a multiple of 10 times the earnings per share for Company A's shares and a multiple of 20 times the earnings per share for Company B's shares. Investors buying shares in Company B have higher growth expectations of Company B than of Company A.

 

Effects of a Stock Dividend on the share price

Let's for example assume the following:

1) the investor holds 100,000 shares in company "ABC" before the event takes effect

2) the market price (written in Green) of the shares before the event = EUR 5.00

3) the nominal value of the shares before the event = EUR 1.00

4) the company announces a Stock Dividend of 0.05 new shares for every 1 old share.

In the example the shareholder will keep all his 100,000 shares and receive additional shares of the company; 100,000 x 0.05 is 5000 new shares with nomial value EUR 1.00. Please note that the nominal value of the company increases (the profits that would normally have been paid out in cash will now be added to the capital of the company), while the nominal value per share remains the same (since there will be more shares). 

 

Depending on the relative size of the stock dividend, it is believed that the share value might increase or decrease. There are many other variables that influence the shareprice, but roughly speaking though it is to be expected that the price in the market stays the same.

 

Assuming that the shareprice does stay the same, our investor would end up with;

(100,000 + 5000) x EUR 5.00 = EUR 125,000

The relative stake of his holdings in the company stay exactly the same

 

For more effects of other corporate actions events on the value of the share price please refer to this site: Effects on the shareprice

 

Process of a Stock Dividend

In terms of corporate actions, dividends are mandatory events. This means that the shareholder does not have to make a choice or to take any action. The additional shares will be paid to them automatically.

There are a few steps that will usually be followed:

1. Acoountants and Controllers of a firm propose a Divididend amount to be paid

2. Board of Directors declares a stock dividend, the amount and the important dates

3. In many cases a Paying Agent (a financial institution specialised in the administrative operations of handling and paying stock dividends) is appointed.

4. The information is being made public in announcements in for example newspapers or in electronic media.

5. On the Ex date the shares trade without the entitlements to the dividend

6. On the Record date the company or the paying agent appointed by the company looks at the records of the company to see who the owners of the company are.

7. On the Pay Date the stock proceeds are being settled on the accounts of the eligible holders of the stock

8. Claims between eligible and non-eligible shareholders need to be settled. For more information about claims, please visit our CLAIMS page. Claims processing is usually being done automatically by custodians and broker dealers.

9. All the books and accounts from all parties down the chain from company to investor need to be adjusted and reconciled.

10. The investors can continue trading the shares as usual

 

Tax Consequences

In most countries there are no tax consequences from a stock dividend.

 

 

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