Stock dividends, as the name suggests, are a kind of dividend that is paid in stocks of the company. For example, you own 100 shares in a company. If the company announces that they’re giving 10% stock dividends, you’ll get 10% stocks from the shares you have, I.e. 10 stocks. Now you have 110 stocks in the company.
However, this method of payment will not increase the stock price of the company. Instead, it would rather reduce its price. This is due to the fact that the numbers of shares increase while the number of shareholders remains the same.
Think of it like a cake shared by 10 people. Initially, each person is entitled to a slice. Now, they apparently are given two slices each from the same cake, but how? By slicing the cake into 20 slices — of course, now each slice is smaller in size.
What investors can do in this situation is usually to wait for the company to grow along with its stock price and sell it for profit or they could even keep the stocks in the hope of a better dividend yield in the upcoming period.
But why would a company take such a position where its stock price would be ‘sliced’ into smaller bits and pieces? There could be multiple reasons.
First, a company might want to make use of the money they have for internal growth, instead of giving it to shareholders to cash out. Second, it could also be that a company is saving its cash to acquire another company.
Third, the company may also seek to spin off a subsidiary company. How it works is that for example, Company A has a subsidiary, Company B. What Company A will do is give dividends to its shareholders in the form of Company B’s stocks.
The downside to stocks dividend is that these ‘sliced-up’ shares cannot be bought in the market like any other stocks, so selling them might be just as hard.