What is a Stock Dividend?

what-is-a-stock-dividend

A share dividend is a dividend in the form of extra shares. From the point of the investor, no ‘real’ dividend is received. Extra shares are issued that are given to existing shareholders. Thus, the value of the firm is spread out over an increased number of shares, thus decreasing the value per share.

From the viewpoint of the firm, however, retained earnings, which is a reserve, is turned into paid-in capital by an amount of the market price at the declaration day multiplied by the number of shares to be issued. Similar to the cash dividend, the declaration date, date of record and the issue date are relevant.

An equity T-account ‘common shares distributable’ is used between the declaration date and the actual issue to show that the firm has committed itself to issuing shares.


Stock Dividend Example

The firm has issued 100,000 shares with a par value of 5 each, of these shares, 10,000 have been repurchased as treasury shares. On March 10th, the firm declares a 5% share dividend to be distributed on April 20th to the shareholders on record on March 24th. The firm’s stock price on March 10th is 10.

Journal entry on the declaration date:

T-account Debit Credit
Share dividend 45,000*
Common shares distributable 11,250
Additional paid-in capital 33,750

* 90,000 shares x 5% share dividend x $10 value per share


Stock Dividends Explained

Key points:

– a share dividend is a dividend in the form of shares; existing shareholders receive additional shares

– at the date of declaration, this dividend is recorded on a temporary T-account ‘dividends declared’ which is subtracted from retained earnings at year’s end

– ‘common shares distributable’ is an equity T-account which indicates that new shares have been declared, but not yet issued

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