Everything on Stock Dividends

Stock dividends is a term you've probably heard a lot during your stock market investment journey. Did you know what stock dividends are? This article will cover everything you need to know about stock dividends.

Understanding stock dividends is essential before you can understand how they work. Dividends are a way for companies to reward shareholders who are listed on stock exchanges. The company's net profit is the condition for receiving dividend payments. The terms of dividend issuance are determined by the company's board of directors. This must be approved by key shareholders. The company may also decide to pay dividends in cash, assets, or stocks.

It is also known as stock dividend, stock bonus, or when the company pays dividends to shareholders in additional shares. Remember that additional shares must not exceed 25% of company's stock. If the company issues more stocks than 25%, it is considered a stock split. Stock dividend payments can be made when the company doesn't have enough cash or wants to keep its cash for investment purposes.

A stock dividend example: This is a stock dividend illustration to help you better understand such dividend payments. Imagine ABC Company with 10 million shares on the market issuing 5% stock dividends. This would imply an additional issuance 50,000 stocks. D would get 5 more shares if he owned 100 shares in XYZ. Stock dividends in India are usually paid on a pro-rata scale. Another example of a stock dividend that is pro-rata for stock bonuses: Let's say XYZ issues stock dividends on a 1:15 basis. Each shareholder will receive an additional 5 shares.

Effect of dividend stock on individual shareholders and market capitalisation for the issuing company: The issuing of dividend stocks doesn't increase the wealth or market value of publicly traded companies' outstanding shares (market capitalisation). Individual shareholders will notice that although there are more stocks than ever, the share price drops. Because the company's market capitalization has not increased, this is why it is not more expensive to own shares.

Let's look at another example of a stock dividend to illustrate the situation. Let's say G is a shareholder in LMN and has 1,000 shares. The market price for each share is Rs 10. He will receive 100 shares if the company announces a 10% dividend. The market capitalisation for LMN is Rs 10 lakh, with 1 lakh shares outstanding. The stock dividend will see an increase in shares to 1.10 million, while the price will drop to Rs 9.09 (Rs 10,00,000/Rs 11,10,000=Rs 9.09).

Shareholder G	Before Dividend	After 10% Stock Dividend
Ownership of Shares	1,000	1,100
Price per Share	Rs 10	Rs 9.09
Total Value of Shares	Rs 10,000	Rs 10,000

For LMN company, please wait.

LMN Company	Dividend stocks before issuing	After issuing 10% Dividend Stocks
Outstanding Stocks	1,Oo,Ooo	1,10,000
Price per Share	Rs 10	Rs 9.09
Market Capitalization	Rs 10,00,000.	Rs 10,00,000.

As the market capitalization of the issuing company remains constant, the issuance of dividend stock doesn't affect the total value of shareholders' shares.

Dividend stocks have many benefits:

Here are some benefits of stock dividend payments

1. The company can keep its cash reserve. This is the main benefit of dividend stocks. This type of dividend payment does not require cash transactions and the company can use its existing cash reserve for business and investment purposes.
2. Tax implications when issuing dividend stocks: Stock dividends are not subject to tax for individual shareholders. Tax implications may be short-term capital gain tax or long-term tax, but only if such stocks are later sold for profit. Cash dividends, on the other hand, have tax implications. The Finance Act 2020 states that dividend income must be paid to shareholders according to the applicable slab rates.
3. Common investors can make stocks more affordable When a company announces dividend stocks, the share price drops. Common investors may find the stock more affordable, and thus be encouraged to buy such stocks. This can help the company maintain an investmentable price range.

There are some disadvantages to issuing dividend stocks

There can be some negative effects from dividend stock issuance. Here are some examples:

1. Wrong sign that the company is in financial distress: Market participants may mistakenly believe that a company will issue dividend stocks if it announces its intention to do so. This could be because the company has difficulty maintaining a sufficient cash reserve. Although there may be multiple reasons for dividend stock issuance from the company's perspective, it can also be misinterpreted. This can negatively impact the stock price of the company.
2. Market participants may misinterpret dividend stock issuances as a signal that the company is investing in risky projects. This could negatively affect its stock prices.

Conclusion:

Dividend stocks are extra shares that are given to shareholders as a reward. This form of dividend payment comes with its own advantages and disadvantages. You now have a better understanding of stock dividends. Make your stock market investment experience smooth by choosing a reliable and trustworthy financial partner. Look out for features like cutting-edge digital trading platforms and a lifetime free Demat account . Also, comprehensive market research reports.