Why Pay Stock Dividends?
A company pays stock dividends as an alternative to cash distributions. Stock dividends are paid as a reward to investors from a company's total shares, while cash dividends are paid from current earnings or preserved profits. Cash distributions are the most common form of dividends, although stock distributions may be made to common stock shareholders.
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Types
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There are several different ways that a company can pay dividends. If profits exceed expectations in a quarter, for instance, cash payments can be made to shareholders. In the instance a company is cash constrained but still wants to maintain dividend distributions and keep investors happy, payments may be made in the form of additional stock.
Identification
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When a company pays a stock dividend, it issues additional shares to its common shareholders. These distributions are made as a fraction paid for each existing share that a stockholder owns. A five percent dividend, for instance, grants investors an additional five shares for every 100 shares of stock owned.
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Features
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Common stock investors are a class of shareholders that receive cash or stock dividend distributions as a perk, not a requirement. Preferred shareholders, on the other hand, are entitled to a cash dividend at a predetermined price on an ongoing quarterly basis. Dividend paying stocks tend to be steady performers even if the stock market goes through a down cycle, according to financial magazine Barrons.
Considerations
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A company's board of directors ultimately decides if dividend distributions will be made to common shareholders. The board votes on this decision on a quarterly and yearly basis. They may vote to maintain, increase, decrease or stop dividends in a quarter based on a company's cash position.
Significance
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Some investors select stocks based on a company's dividend-paying history. In some cases, a company maintains dividend amounts on a quarterly or yearly basis for decades. If these payments are made in the form of stocks rather than cash, an investor can re-invest shares to obtain a larger holding or sell the additional shares for a profit.
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