What does it mean if a stock split is effected in the form of a stock dividend?

Don’t panic if you read that one of your stocks is being split “in the form of a stock dividend.”

For you, the outcome will be the same as a normal stock split — you’ll wind up with more shares but an unchanged total cost basis. Neither action will change the value of your investment, the company’s market cap, or your tax payments. The distinction really just boils down to nitpicky accounting mechanics.

Here’s the bottom line…

A stock split is a re-issue of outstanding shares (shares that have already been issued to shareholders), whereas a stock dividend is a new issue of additional shares.

So what exactly does this mean? Let’s use a visual metaphor…

Imagine a full, uncut pizza. That represents all the shares that have been issued by Gorilla Goals (NYSE: KONG). Mentally cut that pizza into 8 slices and take 1 for yourself. That slice represents your position in Gorilla Goals. Now cut the slice in two. You still have the same amount of pizza, right?

That’s what happens with a stock split. Companies simply split their outstanding shares and cut the per share par value proportionally, leaving you with the same total investment. Again, it’s a re-issue of shares that have already been issued — just at a new ratio and a new par value.

But what about a stock split in the form of a stock dividend? Here’s another visual to help you out…

Think of that same pizza, cut into 8 slices. Again, take 1 slice — that represents your position in Gorilla Goals. Suddenly, a pizza genie appears and produces 8 more slices (that’s 8 more outstanding shares). She decides to give you 1 of these additional slices. So now, you’re left with 2 pizza slices. But you still end up with an eighth of the pizza.

That’s what happens with a stock split in the form of a stock dividend. Companies authorize and distribute new shares. But in contrast to normal stock splits, the per share par value (the size of each pizza slice) doesn’t go down. This won’t affect your equity, though — all shareholders receive the same number of additional shares, so you’ll still own the same proportionate amount of the company.

The Foolish bottom line

As far as you’re concerned, stock splits and stock dividends are just two different means to the same end. A 3-for-2 stock split, for example, would have the same effect as a 50% stock dividend — either way, you’d wind up with 1 additional share for each pre-split share you owned.

For details on a specific stock split and how it’s affecting you, head over to the company’s website or its split announcement. If you’re one of our premium members, you should be able to find additional information on your service’s site.

To learn more, check out our Foolish explanation on how stock splits work, or read Motley Fool co-founder David Gardner’s thoughts on why they’re an overrated buying indicator.

Related Articles

1 Comment

  1. John Z. Norris

    Thanks to Rick Munarriz for his comments on his stumbles with KEURIG, GREEN MOUNTAIN, TRUECAR AND RETAILMENOT. I like his humble reaction. I listened to his evaluation in January, bought 1000 shares TRUECAR at just under $15. Today, it’s my worst loss yet. Reviewing the steps, I don’t fault Rick. I, like Rick, will keep swinging.