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Stock Dividend Strategies?


ValueArb
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This may not be a strategy question per se, as much as a dumb question on something I've never understood.

What is the point of stock dividends? It seems to me that if I own 1,000 shares of a million share company and it issues a 10% stock dividend, it becomes a 1.1M share company, I have have 1,100 shares now but the exact same 0.1% ownership stake. What are the shareholder benefits of a stock dividend?

Do they ever offer any trading/arbitrage opportunities, and if so how would they work?

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It's hard to see how one could translate this into an efficient 'trading' strategy going forward. One would have to guess what the Board is trying to say (we can pay dividends but have chosen not to? to improve liquidity of shares??).

All i know is that it makes the process of tabulating the numbers much more cumbersome if you go back in time and then try to go forward from there especially if the company uses a 1.1:1 or another odd way to go about it.

Possibly related though is the possibility to use (it's more a personal finance question, estate planning) a preferred stock dividend in order to 'orchestrate' an estate freeze for a private business because of the internal changes that occur between retained earnings and paid-in (or contributed) capital within the equity section.

Edited by Cigarbutt
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I think they are mostly a historical artifact of no relevance today.  If I recall my accounting 101 class from many years ago correctly, from an accounting standpoint a stock dividend is treated like the company is purchasing those additional shares out of retained earnings, so the par value of the stock given out in the dividend is debited to retained earnings and credited to the common stock account.

In the old days par value meant something.  Stocks were quoted at percentages of par instead of their actual price, and dividends were paid as a percentage of par.  So if you had a stock with a $100 par value that was trading at $150 and paid a 5% dividend, you would get a $5 dividend.  If the company wanted to increase the dividend payments they might do a 3 for 2 stock dividend first, which would reduce the value per share down to $100 and keep the par value unchanged at $100.  Now you would be getting 5% dividends on 50% more shares, so the stock dividend actually had a real economic effect for you.

Nowadays, par value is irrelevant and usually a nominal amount per share if there is one at all, and as far as I know stock dividends are completely irrelevant as well.  So I doubt there is any strategy to use involving them unless there are some markets that still use the old par value approaches from 100+ years ago.

Edited by aws
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The only "reason" I can think of is that companies sometime use them to pay dividends when they are required to do so without actual paying out any cash. 

REITs that have taxable income (and are thus required to pay out a dividend) but don't want to pay out cash would be an example. 

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