What Is a Stock Dividend — Stock Instead of Cash?

A stock dividend is a dividend that hands out additional company shares instead of cash. For example, with a 2% stock dividend, a holder of 100 shares receives 2 more shares.

From the company's side, it can reward shareholders without outflowing cash, so it's used when the company wants to retain cash internally. A company that needs funds for growth may also choose it.

The key here is that "the whole pie stays the same." If shares outstanding increase via a stock dividend, the per-share value is theoretically diluted by that much.

For example, if a company does a 5% stock dividend, the number of shares increases 5%, but the stock price theoretically adjusts about 5% lower. Since every shareholder receives more shares at the same ratio, your ownership percentage and the total value of your stake do not change. It has a character similar to a bonus issue.

Tax treatment differs by system and country. In the U.S., an ordinary stock dividend is generally not taxed immediately at payment but adjusts the cost basis and is taxed later when you sell.

In Korea, a stock dividend can be taxed as dividend income (mainly valued at par value), which differs from the U.S. So you should not conclude that "a stock dividend is unconditionally tax-exempt," and you must check the taxation rules of the market you invest in. Also, fractional shares that can't be allocated in decimals may be settled in cash.