Stock Dividend Definition, Example, Journal Entries

Duratech’s board of directors declares a 5% stock dividend on the last day of the year, and the market value of each share of stock on the same day was $9. Figure 14.9 shows the stockholders’ equity section of Duratech’s balance sheet just prior to the stock declaration. Companies that do not want to issue cash dividends (usually when the company has insufficient cash) but still want to provide some benefit to shareholders may choose to issue share dividends. When a company issues a share dividend, it distributes additional shares (ordinary shares) to existing shareholders. Share dividends are declared by a company’s board of directors and may be stated in dollar or percentage terms.

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To illustrate, assume that the Hurley Corporation has one million shares of authorized common stock. To date, three hundred thousand of these shares have been issued but twenty thousand shares were recently bought back as treasury stock. Thus, 280,000 shares are presently outstanding, in the hands of investors. After some deliberations, the board of directors has decided to distribute a $1.00 cash dividend on each share of common stock.

Stock dividends are primarily issued in lieu of cash dividends when the company is low on liquid cash on hand. The board of directors decides on when to declare a (stock) dividend and in what form the dividend will be paid. Large stock dividends are those in which the new shares issued are more than 25% of the value of the total shares outstanding before the dividend. In this case, the journal entry transfers the par value of the issued shares from retained earnings to paid-in capital. Cash dividends become liabilities on the declaration date because they represent a formal obligation to distribute economic resources (assets) to shareholders. On the other hand, share dividends distribute additional shares, and because shares are part of equity and not an asset, share dividends do not become liabilities when declared.

What Does Large Stock Dividend Mean?

When dividends are distributed, they are stated as a per share amount and are paid only on fully issued shares. Stock investors are typically driven by two factors—a desire to earn income in the form of dividends and a desire to benefit from the growth in the value of their investment. Members of a corporation’s board of directors understand the need to provide investors with a periodic return, and as a result, often declare dividends up to four times per year. However, companies can declare dividends whenever they want and are not limited in the number of annual declarations. They are not considered expenses, and they are not reported on the income statement.

For example, if a corporation has 100,000 shares outstanding, a 2-for-1 stock split will result in 200,000 shares outstanding. That gives existing investors one additional share of company stock for every 20 shares they currently own. However, this means that the pool of available stock shares in the company increases by 5%, diluting the value of existing shares. A stock dividend merely transfers equity from the company to the shareholder.

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Or, they can sell the additional shares immediately, pocket the cash, and still retain the same number of shares they had before. An investor who owned 100 shares in a company will own 105 shares once the dividend is executed, but the total market value of those shares remains the same. The second significant dividend date is the date of record, 21st July. There is no journal entry recorded; the company creates a list of the shareholders that will receive dividends. If the dividend on the preferred shares of Wington is cumulative, the $8 is in arrears at the end of Year One.

• Even though the total amount of stockholders‘ equity remains the same, a stock dividend requires a journal entry to transfer an amount from the retained earnings section to the paid-in capital section.
• While a few companies may use a temporary account, Dividends Declared, rather than Retained Earnings, most companies debit Retained Earnings directly.
• As discussed previously, dividend distributions reduce the amount reported as retained earnings but have no impact on reported net income.
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A dividend-paying stock generally pays in a range of 2% to 5% annually, whether in cash or in shares. Other companies are touted as „dividend aristocrats.“ They always pay dividends and they tend to increase the size of their dividends over time. Dividends, whether in cash or in stock, are the shareholders‘ cut of the company’s profit. On the date of payment, the corporation mails checks to the appropriate recipients, an event recorded as follows. The subsequent distribution will reduce the Common Stock Dividends Distributable account with a debit and increase the Common Stock account with a credit for the $9,000.

Are dividends an asset on a balance sheet?

For companies, there are several reasons to consider sharing some of their earnings with shareholders in the form of dividends. Many shareholders view a dividend payment as a sign of a company’s financial health and are more likely to purchase its shares. In addition, companies use dividends as a marketing tool to remind investors that their share is a profit generator. A business typically issues a stock dividend when it does not have sufficient cash to pay out a normal dividend, and so resorts to a „paper“ distribution of additional shares to shareholders. A stock dividend is never treated as a liability of the issuer, since the issuance does not reduce assets. Consequently, this type of dividend cannot realistically be considered a distribution of assets to shareholders.

However, if you’re buying dividend-paying stocks in order to create a regular source of income, you would prefer to get the cash. However, it’s not a good look for a company to abruptly stop paying dividends or pay a lower dividend than it has in the past. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.

Shareholders do not have to pay income taxes on share dividends when they receive them; instead, they are taxed when the shareholder sells them in the future. A share dividend distributes shares so that after the distribution, all shareholders have the exact same percentage of ownership that they held prior to the dividend. Stock dividends also provide owners with the possibility of other benefits. For example, cash dividend payments usually drop after a stock dividend but not always in proportion to the change in the number of outstanding shares. An owner might hold one hundred shares of common stock in a corporation that has paid $1 per share as an annual cash dividend over the past few years (a total of $100 per year). After a 2-for-1 stock dividend, this person now owns two hundred shares.

• The board of directors prefers that all profits remain in the business to stimulate future growth.
• The company still has the same total value of assets, so its value does not change at the time a stock distribution occurs.
• The accounting for large stock dividends differs from that of small stock dividends because a large dividend impacts the stock’s market value per share.
• The retained earnings balance is decreased by the fair value of the shares issued while contributed capital (common stock and capital in excess of par value) are increased by the same amount.

Do you remember playing the board game Monopoly when you were younger? The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. If a financial statement date intervenes between https://accounting-services.net/25-high-dividend-stocks-and-how-to-invest-in-them/ the declaration and distribution dates, the Stock Dividend Distributable account should be disclosed as part of Paid-In Capital. Although the 2-for-1 stock split is typical, directors may authorize other stock split ratios, such as a 3-for-2 stock split or a 4-for-1 stock split. Stock dividends may signal financial instability, or at least limited cash reserves.

After the distribution, the total stockholders’ equity remains the same as it was prior to the distribution. The amounts within the accounts are merely shifted from the earned capital account (Retained Earnings) to the contributed capital accounts (Common Stock and Additional Paid-in Capital). The difference is the 3,000 additional shares of the stock dividend distribution. The company still has the same total value of assets, so its value does not change at the time a stock distribution occurs. The increase in the number of outstanding shares does not dilute the value of the shares held by the existing shareholders. The market value of the original shares plus the newly issued shares is the same as the market value of the original shares before the stock dividend.