The differences between a stock dividend and a stock split.
respond to the following:
Contrast the differences between a stock dividend and a stock split.
Imagine that you are a stockholder in a company. Determine whether you would prefer to see the company that you researched declare a 100% stock dividend or declare a two-for-one split. Provide support for your answer with one real-world example of your preference.
From Proffesor:
For this question the main difference between stock dividend and stock split is that a dividend is normally a percentage to purchase more common shares for stakeholders whereas a stock split is two or more new shares for every existing share an investor holds. The shareholder does not pay any additional money. Dividends are also mostly done annually but many companies do not do them because small dividends create more paperwork, expenses, and bookkeeping problems. I would prefer stock split over dividend as it would make more shares and more affordable for those that want more as well as those that might now have been able to afford it otherwise. For example, Microsoft’s stock was almost $175 per share currently. If split I would have 2 shares and they would both value $87.50 meaning I have not lost anything. I can buy more and others that are not willing to spend over $100 per share can now invest as well. In the long run I will gain more money from a split. There are many other companies that each share cost way more for example Tesla. Currently Tesla’s stock price was almost $800 per share. Would you be more willing to buy stock in Tesla if it were to split? Or would you buy at its current price and hope for dividends at the end of the year? The following article provides a little more on stock split and stock dividends.
Sample Solution
A stock dividend is a payment of company’s profits to its shareholders which is usually paid out in the form of additional shares. On the other hand, a stock split involves an alteration in the number of outstanding shares that are held by each individual shareholder (Ketchen et al., 2019).
When deciding between a stock dividend and a stock split, it is important to consider how such decisions will affect your ownership stake within the company. A 100% stock dividend will result in you receiving additional shares equal to what you already own while a two-for-one split would give you double the amount of shares than before (Gitman & Zutter ,2018).
One example where I personally preferred to see my company declare a two-for-one split was Apple Inc. back in 2014 when they announced their 7:1 split due to significant appreciation seen in their share prices over past few years(Apple Inc., 2020). This decision allowed me and other shareholders to increase our respective stakes within Apple while also providing us with more liquidity as these newly created stocks could be easily traded on market thus allowing us maximize returns further.
Overall, both dividends and splits have different advantages but depending upon personal needs either one can provide better value for investors . In this case, I felt that taking into account overall appreciation seen in share price as well as increased liquidity provided by splitting stocks , it was best decision for me as long term investor.
