Stock dividends and splits: Overview, definition, and example
What are stock dividends and splits?
Stock dividends and stock splits are both actions taken by a company to adjust its shares and distribute value to shareholders, though they differ in how they affect shareholding and the company's capital structure.
- Stock Dividends occur when a company issues additional shares of stock to its existing shareholders in proportion to the shares they already hold, rather than paying out cash. These dividends are usually issued as a percentage of the existing shares (e.g., a 10% stock dividend would give a shareholder 10 new shares for every 100 they already own). Stock dividends increase the number of shares outstanding, which may dilute the value of each individual share.
- Stock Splits occur when a company issues additional shares to shareholders by increasing the number of shares outstanding, typically to reduce the trading price of the stock to a more attractive level. For example, in a 2-for-1 stock split, a shareholder who owns 100 shares will now own 200 shares, but the value of each share will be halved. Stock splits do not affect the overall value of the investment but can make shares more affordable and liquid.
Why are stock dividends and splits important?
Stock dividends and splits are important because they allow companies to adjust the number of shares in circulation, either to reward shareholders (in the case of dividends) or to make shares more accessible to a wider market (in the case of splits). Both actions can help improve liquidity, encourage trading, and potentially increase market interest in the company's stock.
For businesses, stock dividends and splits can serve as a signal of financial health or a strategy for managing the stock price. For investors, these actions may result in more shares or more affordable stock prices, though they should be aware that stock dividends can dilute the value of each share.
Understanding stock dividends and splits through an example
Imagine a company that has 1,000,000 outstanding shares and declares a 10% stock dividend. If you are a shareholder holding 100 shares, you will receive an additional 10 shares as a dividend, increasing your total holdings to 110 shares. The overall value of the company and its shares does not change, but shareholders now own a greater number of shares.
In the case of a stock split, imagine a company that announces a 2-for-1 split. If you own 100 shares, you will now own 200 shares, but the price per share will be halved. While the number of shares you own increases, the total value of your investment remains the same immediately after the split.
An example of a stock dividend and stock split clause
Here’s how a stock dividend or stock split clause might look in a contract:
“In the event of a stock dividend or stock split, the Company agrees to issue additional shares to the Shareholders in proportion to their existing holdings, subject to the terms outlined herein. The number of shares received will be adjusted in accordance with the Company’s established procedures for stock dividends or splits, and the Company shall notify Shareholders in writing of any such event.”
Conclusion
Stock dividends and splits are strategic tools that companies use to adjust their share structure. While stock dividends increase the number of shares in circulation, stock splits reduce the price per share without changing the total value of a shareholder's investment. Both actions can influence stock liquidity, market interest, and shareholder satisfaction.
For businesses, stock dividends and splits are useful for managing the company’s equity structure and ensuring that shares remain accessible to investors. For investors, it’s important to understand how these actions may affect their holdings, both in terms of share quantity and value.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.