Stock Dividend

Question: A corporate press release issued on May 19, 2009, informed the public that “Green Mountain Coffee

Roasters Inc. today announced that its Board of Directors has approved a three-for-two stock split to be effected

in the form of a stock dividend. The Company will distribute one additional share of its common stock to all

shareholders of record at the close of business on May 29, 2009, for every two shares of common stock held on

that date. The shares will be distributed on June 8, 2009.”

Obviously, as shown by this press release, a corporation can issue additional shares of stock to shareholders

instead of distributing only cash dividends. These shares can be issued as a stock dividend or in a slightly different

manner as a stock split1.No assets are distributed in either of these scenarios—just more shares of the company’s

own stock. Are shareholders better off when they receive additional shares in a stock dividend?

Answer: When a stock dividend is issued, the number of shares held by every investor increases but their

percentage ownership stays the same. Their ownership interest in the corporation remains proportionally

unchanged.

To illustrate, assume that the Red Company reports net assets of $5 million. Janis Samples owns one thousand of

the outstanding ten thousand shares of this company’s common stock. She holds a 10 percent ownership interest

(1,000/10,000) in a business that holds net assets of $5 million.

The board of directors then declares and distributes a 4 percent stock dividend. For each one hundred shares that a

stockholder possesses, Red Company issues an additional 4 shares (4 percent of one hundred). Thus, four hundred

new shares are conveyed to the ownership as a whole (4 percent of ten thousand) which raises the total number

of outstanding shares to 10,400. However, a stock dividend has no actual impact on the corporation.