Sometimes, instead of paying out a dividend in the form of cash or property, a company pays investors with additional shares of the company's stock. In your brokerage account, you'll see a bunch of new shares show up, but before you pop too much champagne to celebrate your new wealth, you need to understand the impact of a stock dividend on the price per share.
Calculating New Price
To figure the new average price after a stock dividend, convert the percentage of the stock dividend to a decimal by dividing by 100. Then, add it to 1. Finally, divide the initial stock price by the result to find the new stock price. For example, say a company has 1 million shares, worth $100 each before the dividend. If the company declares a 10 percent stock dividend, divide 10 by 100 to get 0.1. Then, add 0.1 to 1 to get 1.1. Finally, divide $100 by 1.1 to find the new average stock price is $90.91.
Stock Dividend Effects
A stock dividend is different than a cash or property dividend because it doesn't change the assets of the company, just how many pieces, or shares, they're divided into. For example, say a company is worth $100 million and has 1 million shares outstanding, making each share worth $100. If the company pays a $1 million cash dividend, the company is now only worth $99 million. So, each share is now worth $99, but each shareholder has $1 in hand from the dividend. On the flip side, a 10 percent stock dividend increases the number of shares outstanding to 1.1 million, but the company is still worth $100 million, so each share is now worth only $90.91. But, since each shareholder has 10 percent more shares, the total value remains unchanged.
Though in theory the company is worth the exact same amount immediately after the stock, sometimes the price goes up slightly. Companies use stock dividends to dilute the price of the stock so that it's more accessible for more investors. For example, say a company's shares are trading at $100 per share, but the company believes that more investors would be interested in it if they could buy shares for $90. If the company declares a 10 percent stock dividend, that lowers the price, which may increase demand for the stock, thereby raising the overall value of the company.
Stock splits work essentially the same way as stock dividends, so the terms may be used interchangeably. For example, a two-for-one stock split is really the same as a 100 percent stock dividend: At the end of the day, you have two new shares for every old share you owned before the split or dividend. Instead of getting caught up in the stock price, look at the overall value instead.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."