What is the difference between cash dividends and stock dividends?
Dividends
Cash dividends distribute cash to shareholders, reducing assets and equity, while stock dividends distribute additional shares, reallocating equity between accounts without affecting total equity.
Cash Dividends vs Stock Dividends
Both are distributions to shareholders, but with different accounting treatment and effects on the company.
Cash Dividends:
- Distribution of cash to shareholders
- Reduces company cash and retained earnings
- Taxable to shareholders when received
- Requires available cash
Stock Dividends:
- Distribution of additional shares to shareholders
- No cash outflow from company
- Reallocates equity (retained earnings to share capital)
- Generally not taxable until shares sold
Accounting Differences
Cash Dividend Journal Entry:
When declared:
- Dr Retained Earnings $100,000
- Cr Dividends Payable $100,000
When paid:
- Dr Dividends Payable $100,000
- Cr Cash $100,000
Stock Dividend Journal Entry:
Small stock dividend (less than 25%):
- Dr Retained Earnings $100,000
- Cr Common Stock $40,000 (par value)
- Cr Additional Paid-in Capital $60,000 (excess)
Large stock dividend (25% or more):
- Dr Retained Earnings $100,000
- Cr Common Stock $100,000
Key Differences Summary
| Aspect | Cash Dividend | Stock Dividend |
|---|---|---|
| Cash Effect | Cash outflow | No cash effect |
| Assets | Decreases cash | No change |
| Equity | Decreases retained earnings | Reallocates within equity |
| Share Count | No change | Increases |
| Share Price | May decrease on ex-date | Decreases proportionally |
| Tax Treatment | Taxable when received | Generally not taxable until sold |
| Shareholder Wealth | Immediate cash | More shares, lower price per share |
Important Notes:
- Both reduce retained earnings
- Neither is an expense on income statement
- Stock dividends increase shares outstanding
- Cash dividends require sufficient cash and retained earnings
- Stock dividends don't change ownership percentages