This is a follow up to two articles I have written before - Cash Dividends, and Earning Money. In Cash Dividends article, I discussed why companies like Apple and other high growth companies do not have an active dividend policy. In Earning Money Article, I discussed some of the problems people fall into, in their quest to "mine the gold" on the Internet. In this article, I will be listing some of the basics behind "Stock Dividends", and why some companies issue Stock Dividends.
If I recall correctly from my 2 years of Financial Classes and still on going courses, Stock Dividends is a method through which Corporations issue additional stocks instead of Cash. For example, when a company normally distributes its dividends, it gives out "cold hard cash". The money they payout through their dividends is deposited in your bank, which you can use it like any other cash. When a company issues stock dividends instead of cash dividends, you get additional shares of a company (or a fraction of it).
Since a lot of us are familiar with Cash Dividends, I will use it to contrast it in the following example. Lets say Microsoft gave out new dividends for the first fiscal Quarter of 2007, and it was $1 Dividends Per Share. You have 100 Microsoft shares, so that would mean that when Microsoft pays out dividends to its shareholders, you as an owner of 100 shares would get $100. The money would be deposited in your bank account.
Now, lets say for the second quarter Microsoft decided that it would not issue Cash Dividends, but rather Stock Dividends. The company decided that for every 10 shares of Microsoft you own, you would get one additional share. Since you own 100 shares of Microsoft, and the Stock Dividend is 10 to 1, you would have 10 Shares.
Why do some companies issue Stock Dividends? There are a variety of reasons; it is possible that the company does have enough cash on hand to distribute, so they issue additional stocks. There are some advantages too, when you are issued cash dividends, the money you get from the company is taxes, but if you get stock dividends the shares are retained by the company and you are not taxes, essentially you save yourself money by not paying the Big Brother proceeds of your earnings (you have to pay the taxes on capital gains eventually).
Weighted Average Cost of Capital
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