Stock Dividends and Splits

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Posted by Bob on August 27, 19100 at 08:04:52:

The dividend policy of a company is determined solely by its Board of Directors. In spite of the phrase "dividend policy," most companies either don't have an actual corporate policy for dividends or don't follow their policy consistently. There is no reasonable explanation for most dividend actions by most companies most of the time, and thus a company's dividend history may not be a reliable guide to future dividend distributions.

Stock dividends, as opposed to cash dividends, have no economic value. They result in dilution of assets and earnings per share, i.e. more pieces of paper representing the same proportion of the total company as before. A stock dividend is a small stock split, say 20% or less. A 20% stock dividend is equivalent to a 5-for-4 stock split.

Stock dividends and splits merely increase the total number of shares outstanding. Nevertheless, they have an appeal to speculators who often look for any excuse to trade. A regular annual stock dividend, as opposed to an extraordinary unpredictable stock dividend is less subject to manipulation.

For insightful commentary on this topic, see Graham and Dodd's Security Analysis: The 1934 Classic Edition (1996 reprint), pp 339-341 and pp 589-591.

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