When a company wants to provide a return to stockholders, it needs to evaluate its cash available to pay dividends. When the company lacks enough cash to pay dividends, it might consider issuing stock dividends to the shareholders. This provides additional shares of stock to each stockholder. For companies who own stock in that corporation, the stock dividend increases the total number of shares it owns. Common stock dividends decrease shareholders' equity for the issuing company.
Common stock represents a partial ownership in a business. Investors purchase shares of common stock for several reasons. Most want to reap the financial rewards of owning the stock. These rewards involve the potential for selling the stock in the future at a gain or receiving dividend income while they own the stock. Some investors want to make decisions regarding company activities. Each share of stock provides the owner with one vote on major company decisions, such as mergers or acquisitions.
Declared Stock Dividend
The decision to declare a stock dividend comes from the board of directors. The board of directors reviews the financial statements of the company and considers its strategic plans for the future. The board of directors also considers the current market price of its stock. If the board declares a stock dividend, the supply of stock shares available for sale will increase and the price will decrease. This may increase interest in the company stock as more investors will be able to afford to purchase the stock. If the board of directors agrees to declare a stock dividend, it also determines how much stock each investor will receive. The company expresses this as a percentage. For example, a 10 percent stock dividend increases the number of shares owned by each investor by 10 percent. When the company declares a stock dividend, it increases Common Stock Dividend Distributable and decreases Retained Earnings.
Issued Stock Dividend
When the company issues the shares of stock for the dividend, it experiences no impact in shareholders' equity. The company increases Common Stock and decreases Common Stock Dividend Distributable.
Stock Dividend Received
If a company invests in a corporation that issues a stock dividend, it makes no entry in its financial records. Instead, it changes the notes to the financial statements and adjusts the number of shares it owns.
- Comstock/Comstock/Getty Images