The stock dividend meaning can be described as a method utilized by companies to provide shareholders with specific types of wealth or earnings. In other words, a stock dividend refers to the type of payment that is made not in the form of cash but the form of shares.
Today, we are going to find out about the disadvantages and potential risks of stock dividends as well as the impact they can make on market capitalization.
Stock dividends are issued to oppose cash payments. They happen when the issuer runs out of cash being unable to pay out to its shareholders. The form and the payment date for the stock dividend are usually defined by the Board of Directors.
Some beginner investors mistakenly think that both cash and stock dividends result in market capitalization and lead to shareholders’ wealth. In reality, shareholders do not become richer with a bigger number of shares as their price decreases accordingly. In other words, market capitalization remains the same.
While receiving stock dividends does not always mean increased wealth for the shareholder, it still comes with some obvious advantages although some slight downsides also take place.
Despite all benefits, stock dividends come with specific risks. On the one hand, they are not taxed. On the other hand, they can hardly be a better alternative to cash, as they do not increase shareholders’ wealth or market capitalization.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.