Stock Dividends

Corporations sometimes issue stock dividends. Stock dividends are shares of stock distributed by a company to its current stockholders without charge to the stockholders. The effect of a stock dividend is to increase the number of shares of stock a company has outstanding and the number held by each stockholder. The increase in the number of shares held by each stockholder is in proportion to the number that stockholder owned before the distribution.

For example, assume that you owned 1,000 shares of Druid Company's stock on June 1, 2004, the date the company distributed a 5% stock dividend. You would receive 50 additional shares (1,000 shares X 5%). The total number of shares of common stock outstanding increased by 5% as a result of this distribution.

Unlike cash dividends, stock dividends do not decrease a company's cash. No cash is paid out. The amount of the stock dividend is subtracted from retained earnings and added to contributed capital. Therefore, the total amount of stockholders' equity does not change. The amount transferred is the market price of the stock at the time the dividend is declared.

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