---
title: "What is a Stock Dividend?"
description: "What is a stock dividend? Learn how a dividend paid out in fractional shares is different from the cash dividend you're used to."
canonical_url: https://trendshare.org/how-to-invest/what-is-a-stock-dividend
markdown_url: https://trendshare.org/ai/what-is-a-stock-dividend.md
published: 2013-05-22
last_updated: 2018-01-29
content_license: https://trendshare.org/about/disclaimer
---
# What is a Stock Dividend?

Source: https://trendshare.org/how-to-invest/what-is-a-stock-dividend
Updated: 2018-01-29
When a company makes money, sometimes it pays the owners of the company (the
shareholders) a little bit of money for each piece of the company they own.
That's a regular dividend. [Not all companies pay dividends](https://trendshare.org/how-to-invest/why-do-some-companies-not-pay-dividends), but many companies do.

A company that *does* pay dividends is most likely a company making
money. Maybe it's not making huge amounts of money year after year, but good
companies which pay regular dividends are good companies to own.

## What is a Stock Dividend?

Sometimes a company pays a dividend not in cash but in additional shares of
the company—additional shares of stock. This is a *stock
dividend*.

Suppose you own 100 shares of Acme Lemonade Stands. The company had a good
year and [earned a lot of money](https://trendshare.org/how-to-invest/earnings-matter-most). The company
wants to pay its owners—its shareholders—some of that money.
Normally you might think the company would pay a small amount of money to each
shareholder for each share of the company they own. If they pay $1 per share,
you get $100. (See [What is Dividend Yield?](https://trendshare.org/how-to-invest/what-is-dividend-yield))

If the company instead decides to pay a stock dividend, you'll get an extra
fraction of a share for each share you own. For example, if they give 5% of a
share for every share you own, you'll get 5 extra shares and will subsequently
own 105 shares.

If this sounds like a stock split to you, you're right. They're very
similar.

## Why Would a Company Pay a Stock Dividend?

Why would Acme Lemonade Stands pay a stock dividend instead of a cash
dividend? There are a few reasons. The most obvious is that [the company may not have the liquid cash available to pay a dividend](https://www.investopedia.com/terms/s/stockdividend.asp). (In that case,
*why* pay a dividend? Not everything makes sense.)

As a benefit to shareholders, [they generally do not have to pay taxes on a stock dividend](https://www.investopedia.com/ask/answers/05/stockcashdividend.asp), where they do on a
cash dividend—at least until they sell them.

While issuing new stock for a dividend may dilute the value of existing
stock, increasing the pool of available stocks (as with a stock split) may
increase the [liquidity of the stock](https://trendshare.org/how-to-invest/what-is-liquidity), thus
potentially improving its price. Furthermore, some of the accounting practices
required to pay a stock dividend may end up *increasing* the market
capitalization of the company.

Even though it may seem like the relative value of each share will decrease
(because there are more shares available),the increase in market capitalization
should offset any dilution. In other words, people expect the price of the
stock to stay about the same after the stock dividend.

## Is a Stock Dividend Better than a Cash Dividend?

Some people prefer stock dividends because they offer investors more
options: you can keep the stock or sell it for cash. In practice, it's probably
a wash.  Whether you prefer a cash dividend to a stock dividend is up to you.
The tax consequences of a stock dividend may be more attractive, but you don't
have to do anything to realize the value of a cash dividend. You can, of
course, [reinvest a cash dividend back into the company](https://trendshare.org/how-to-invest/what-is-dividend-reinvesting), but you could also immediately sell the new shares
granted to you by the stock dividend.

Stock dividends are rarer than cash dividends (possibly because they require
more accounting), but in either case, a company making enough money to return
some of it to its shareholders is doing well. You're fortunate to own such a
great company—especially if you [bought it at a great price](https://trendshare.org/how-to-invest/what-is-value-investing)!