The Differences Between a Stock Split and a Stock Dividend

Stocks that pay dividend bring income to their investors.

Stocks that pay dividend bring income to their investors.

When you own stocks, your profound hope is that their share price will rise ever higher. Growth, however, is not the only way to make money in the stock market. Many companies pay dividends to their shareholders, which is another way to profit from stocks. Stock splits may give you a warm and fuzzy feeling because you have more shares, but you don't make money from a stock split.

Stock Dividend Basics

Consider stock dividend your own little piece of the company profits. Shareholders receive a distribution of company profits called a dividend. Not all stocks pay regular dividends, and some never pay them at all. The beauty of dividends is that the stocks that pay them also have the potential for capital gains. You have two chances to win: if a dividend is paid and if the stock price rises.

Where to Find Dividend Stocks

Mature companies are most likely to pay dividends. You've probably heard of many of them because they are giants of industry. PepsiCo, AT&T and Proctor & Gamble are just a few examples of the types of companies that pay dividends. If you check a company's historical price chart, you will find a dividend history. Although there are no guarantees when it comes to the stock market, if a company has consistently paid dividends over the decades, there's a reasonably good chance it will continue to do so. If you don't want to mess with buying individual stocks, you can alternatively invest in mutual funds or exchange-traded funds (ETFs) that seek out stocks that pay dividends.

Dividends and Payout Ratios

When you research a dividend-paying stock, inspect its dividend payout ratio. This is a number that represents the percentage of its profits that distributed to its shareholders as dividends. A low number usually means the profits are being reinvested into the business. The reason many small or fast-growing companies do not pay dividends is because they are concentrating efforts on further growth. Keep an eye out of very high payout ratios, which may be a signal of an upcoming dividend cut.

Stock Split Basics

Companies sometimes split their shares, thereby making the price per share more affordable to individual investors. If you already hold stock in the company your number of shares will increase, but the total value will remain the same since the price per share will decrease proportionately. It's mostly a psychological move. New investors don't feel as though they're paying an outrageous price per share, and existing investors feel a rush as they suddenly own more shares. Never mind that the value remains the same overall.

The Stock Split-Stock Dividend Relationship

Stock splits and stock dividends do not have a direct correlation or a cause-and-effect relationship. If the company pays a dividend and has a stock split, the dividend per share will fall proportionately. However, since you now have more shares, you'll still receive the same amount of money from dividends as you did prior to the split.

 

About the Author

Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.

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