A stock dividend occurs when the company uses the amount of money that would be paid as a cash dividend to purchase additional common shares for the shareholder. A stock split happens when a company issues two or more new shares for every existing share an investor holds. When an investor considers purchasing stock that has issued a stock dividend or that has been split, the investor needs to consider whether the company's goals in issuing a stock dividend or making a stock split match the investor's goals for wanting to invest in the company. If the investor's goals and the company's goals are incompatible, the investor should consider investing in another company.
Function
Companies that are pursuing growth will want to keep any cash they have to invest in the company. In this case, a stock dividend is issued.
A stock split occurs when a company feels its stock is above the popular price range for their stock. The company uses the split to bring the stock price into the desired range.
Similarities
With a stock dividend and a stock split, an investor will gain more stock than they had before they received the dividend or the split took place. Both stock dividends and stock splits are issued based on the company's goals.
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Differences
A stock dividend is issued to keep earnings in the company and make the company more valuable in the future. When a company is considered more valuable, stock prices rise.
A stock split is performed because a company's stock is outperforming the company's goals. Because a company does not want to encourage speculative bubbles that cannot be sustained by the market, it uses a stock split to decrease the price of stock and bring it into a more acceptable price range.
Advantages
The advantages of both stock dividends and stock splits lie in the future expectations for the company. If the company is expected to grow, then having more of the company's stock is worthwhile because an investor can sell the stock in the future and make a larger profit.
Disadvantages
If a company does not perform according to investor expectations, an investor will have a larger amount of his portfolio tied up in an investment that will not make as much money as expected, or might even lose money. Because stock dividends and stock splits increase the amount of stock an investor has, this disadvantage applies to both of them.
