Explanation :Many companies issue dividends to shareholders to maintain stock prices and stock demand. Companies like GE issue dividends to its shareholders every year. These quarterly and annual payments drive the demand for GE stock. Obviously, in order for a company to issue a dividend, it has to have the cash to give to its shareholders. What happens when a company wants to incentivize its shareholders with a dividend, but it doesn’t have the cash to issue a dividend? Companies can issue a stock dividend. Instead of giving shareholders cash, the company gives them additional, unissued stock. A stock dividend is also different from a cash dividend in that a cash dividend reduces assets and equity. Cash is given away while the dividend reduces the company's retained earnings.
In a nutshell :
- A stock dividend is a dividend paid to shareholders in the form of additional shares in the company, rather than as cash.
- Stock dividends are not taxed until the shares granted are sold by their owner.
- Like stock splits, stock dividends dilute the share price, but as with cash dividends, they also do not affect the value of the company.