What is a stock dividend?

Alright, let's start this explanation with a brief definition. On the most basic level, a
dividend is the payments that a particular company makes to its shareholders. There is a
variety of different ways that companies come up with dividends to pay to its
shareholders. When a company actually earns a profit, then it can reinvest that money
into the business. This is called retained earnings. These earnings can be paid to the
shareholders a dividend. In the United States, boards of directors generally announce
dividends quarterly, though in some other countries, dividends are biannual. In the
United States, dividends are entirely up to the board of directors, and shareholders have
no say when it comes to deciding the amount and the style of dividends. This means that
if a company has a bad year, then it can either keep on paying dividends from a previous
year's retained earnings, or it can decide not to pay them at all. Similarly, if a company
has a really good year, then they can give shareholders special dividends with the extra
money that they have reinvested.

There are a few different ways that a company can give dividends to its shareholders. Usually, a company will pay dividends in cash. Cash dividends still count as investment interest and income. So cash dividends are taxable in the year that you receive them.

Stock dividends are another way that dividends are paid to shareholders. Stock dividends are also called scrip dividends. When a company pays dividends in the form of stocks, this means that you will be paid your dividend by receiving additional stock shares from either the original corporation or maybe one of its subsidiaries. Generally speaking, stock dividends are issued proportionally to the amount of shares that you already own in a company. This means that if you own more shares, then you will be paid more shares as a dividend. Issuing stock dividends doesn't lower the total value of all of the shares held, but it does lower the price of each share while increasing the total number of shares. Market capitalization stays the same.
There's another type of stock dividend that you should know about. A stock split is basically a really big stock dividend. This means that when a company decides to issue a stock split, they double, triple, or quadruple the number of shares outstanding that exist. This really just means that the value of each share that you own is lowered. Nothing changes in terms of economic reality.

Some theorists content that stock dividends should be paid instead of cash dividends. If stock dividends are paid, then any investors that don't want to be taxed on their earnings and want to stay invested in the business can just hold on to their new stocks. On the other hand, if an investor wants cash right then, he or she can simply sell the stocks, converting the stock dividend to a cash dividend.

Now, just because a company does not pay dividends does not mean that you should not invest in it, unless you want immediate cash or an immediate benefit of that nature. Sometimes the company chooses to invest money in other areas, like development, research, expanding the company. Some people believe that if a company is really eager to give money back to the shareholders in the form of dividends, cash or stock, then perhaps they just don't have any thing in the future of the company to invest in.

If you hold stock in a company that does not pay cash dividends, when you sell your shares then you can get better benefits. You'll also be better off if a company eventually liquidates and distributes all of its assets, since there will be more to be divided among the shareholders.