Question

When using stock dividends; do you think it is better to use the small stock dividends or large stock dividends as a big corporation like Toyota?

Answer 1

• A stock dividend is a dividend paid in the form of additional shares rather than a cash dividend. A stock dividend is a fraction of the existing shares, for example corporate pays out stock dividends of 0.5 shares of the existing shares held by the shareholders. These are not taxed until the stocks are sold by investors.
• With stock dividend, total value of equity remains the same from the investors point and the company's perspective. Funds transferred from retained earnings account to paid up capital account depends on whether the dividends are small stock dividends or large stock dividends. A stock dividend is considered small when the number of new shares issued is less than the 25% of total number of shares before dividend. Large stock dividends arise when the number of new shares issued are more than 25% of the total value of shares before dividend.
• Since Toyota is a big corporation, it should use large stock dividends to maintain stock prices and stock demand. It has effect of increasing the number of shares of the corporation. Payment of larger stock dividends projects higher profits. It helps in raising future dividends of shareholders. This encourages shareholders to invest more in the corporation, hence increasing share price.