Stock dividends represent an important source of additional income for investors.
Stock dividends are periodic payments that a corporation makes to its shareholders. These payments are typically approved by corporate directors and may occur monthly, quarterly or annually. Financial reporting standards for stock dividends may vary, depending on geography, industry or corporate legal status. Stock dividends may be paid to common or preferred shareholders.
Stock Dividend Defined
A stock dividend represents cash or other assets that a corporation periodically sends out to shareholders, or stockholders. A stockholder is a corporation's owner and may be an individual or an organization. Stock dividends may be sent to a common (regular) shareholder or a preferred shareholder. A preferred stockholder's dividend rights take precedence over common dividends, that is, a corporation typically pays preferred dividends before common dividends.
Dividend Reporting
Generally accepted accounting principles (GAAP) require a corporation to record periodic dividends in accounting records and prepare complete and "fair" financial statements ("fair" means accurate and objective in accounting parlance). Complete financial statements include balance sheet, statement of profit and loss (or P&L), statement of cash flows and statement of retained earnings. Accountants record dividends in the balance sheet and the statement of retained earnings, although dividend payments occasionally may be reported in the financing activities category in the statement of cash flows.
Significance
Stock dividends play a pivotal role in modern economies because many small (and large) investors rely on share price increases and cash dividends as a source of additional income. For example, an Ohio-based retired electricity analyst owns $100,000 of a New York-based financial institution's stock. The financial institution pays dividends every quarter, and the electricity analyst regularly receives $2,500 per quarter in dividend payments. He may use the payments to supplement other sources of income.
Time Frame
A corporation records stock dividends in accounting ledgers based on three dates---declaration, record and payment dates. Declaration date refers to the date a corporation's board of directors publicly declares dividends to be paid. Record date indicates the date by which an investor must own shares to be entitled to dividends. Dividend checks are sent out on the payment date. For example, a New Jersey-based fast-food company declares on Jan. 25 that quarterly dividend checks are mailed on April 1 to shareholders with a record date of March 15. In this case, Jan. 25, March 15 and April 1 are declaration, record and payment dates, respectively.
Features
A corporation occasionally may pay shareholders with additional stock, instead of cash. A company may do so if it experiences short-term liquidity problems or needs to hold cash for a major expansion project. Shareholders receive stocks as dividends and see increases in their stock holdings. For example, a bank cashier holds an insurance company's stocks currently valued at $10,000. If the insurance company declares stock dividends of $1,000, the cashier receives no cash but sees her stock holdings increase to $11,000.
