Stock dividends, also known as scrip dividends, are a form of payment a company makes to its shareholders by issuing additional company stock instead of a cash payout. Stock dividends are proportionally distributed to shareholders based on the number of shares held. They are usually a fraction or percentage of shares owned.

Companies may pay stock dividends because they do not have enough available cash to pay their shareholders. Stock dividends are also issued as a way for a company to lower its stock prices in order to encourage more share trading.

For example, Company F’s market capitalization is $5,000,000. It has 100 shareholders who each own 1,000 shares of company stock. Each stock is worth $50 per share.

If Company F decides to issue a 10 percent stock dividend, then each investor will receive 10 extra shares. For every 100 hundred shares owned, the shareholder will receive 10 dividends (in this scenario.) Each shareholder now has 1,100 shares for a total of 110,000 shares outstanding.

Because the market capitalization of the company remains the same, Company F is still worth $5,000,000. Although the number of shares owned by each shareholder has increased, the value of the stock has decreased. The value of the stock is no longer $50 per share but $45.454 per share.

Investors who prefer a cash dividend can opt to sell the shares they received from the stock dividend.