Stock Dividends and Stock Splits
Stock dividends and stock splits both hand shareholders more shares without any cash changing hands. The company is worth the same, so the price per share falls to match, and your slice of the pie stays identical. The main differences are size and accounting treatment, not value.
What you will learn
- What stock dividends and stock splits are
- How to find the new share price after a split or stock dividend
- Why neither one creates value for shareholders
- The accounting difference: retained earnings vs par value
- Why companies still do them: trading range and signaling
The formulas
- d
- stock dividend as a percentage, e.g. 10% = 0.10
- Old price
- share price before the stock dividend
- a-for-b
- a new shares for every b old shares, e.g. 2-for-1
Worked example
A company has 1,000,000 shares at $30 (market value $30 million). Compare a 10% stock dividend with a 2-for-1 split for an investor holding 100 shares.
- 10% stock dividend: shares = 1,000,000 × 1.10 = 1,100,000.
- New price = $30 ÷ 1.10 ≈ $27.27; the investor now has 110 shares × $27.27 ≈ $3,000.
- 2-for-1 split: shares = 2,000,000 and price = $30 × 1 ÷ 2 = $15.
- The investor now has 200 shares × $15 = $3,000.
Answer: In both cases the company is still worth $30 million and the investor's stake is still worth $3,000 (prices rounded to the cent). More shares, lower price, same wealth.
Common questions
What is the difference between a stock dividend and a stock split?
Both give shareholders more shares for free. A stock dividend is usually small, like 5% or 10% extra shares, and moves an amount from retained earnings into share capital. A split is usually larger, like 2-for-1, and simply cuts the par value per share with no transfer from retained earnings.
Does a stock split increase value?
Not by itself. The company's assets and cash flows don't change, so its total market value stays the same and the share price falls in proportion. Any price rise around a split usually reflects the good news management is signaling, not the split itself.
How is a stock dividend recorded?
Under US GAAP, a small stock dividend (generally under 20 to 25% of shares) is recorded at market value, moving that amount from retained earnings to common stock and additional paid-in capital. A large stock dividend is recorded at par value. A split needs no journal entry beyond updating par value and share count.
What is a reverse stock split?
A reverse split combines shares, for example 1-for-10, so shareholders own fewer shares at a higher price. Total value is unchanged. Companies often do it to lift a low share price, for instance to meet a stock exchange's minimum price rule.