When are Stock Dividends Paid Out?

A company that generates profits consistently usually distributes it to its shareholders in the form of dividends. The payment of dividends is seen as a way for companies to reward their shareholders for investing in the company. Moreover, since shareholders are part owners of the company, they’re also entitled to the profits the company earns. 

The issue of stock dividends is one of the ways through which a company distributes its profits. Want to know more about stock dividends and how they’re paid out? Here’s a closer look at this unique concept. But before we proceed, let’s get a proper understanding of the basics. 

What is Dividend in the Stock Market? 

In the share market, a dividend refers to the distribution of a portion of profits by a company to its shareholders. Dividend payments are made periodically on a quarterly or an annual basis depending on the company’s policy. 

The amount of dividend a shareholder is entitled to is based on the number of shares that they own. For instance, if a company declares a dividend of Rs. 10 per share and you own 500 shares in the company, you would be entitled to get a dividend of Rs. 5,000. 

What is a Stock Dividend?

Now that you’ve seen what a dividend in the share market is, let’s take a look at the concept of stock dividends. 

A stock dividend, also known as a bonus issue, is a unique corporate action where a company issues additional shares to its existing shareholders for free. These additional free shares are often offered in proportion to the existing holdings. 

For instance, assume a company declares a stock dividend in the ratio of 1:1. This means that for every 1 share you hold in the company, you would be entitled to get 1 additional share free of cost. So, if you have 500 shares in the company, you would get 500 additional free shares, increasing your total shareholding to 1,000 shares.

The primary purpose of issuing a stock dividend is to distribute the company's profits to its shareholders without using cash. By issuing bonus shares, the company can retain the cash and use it for other business and strategic purposes. 

When is a Stock Dividend Paid Out? 

Unlike cash dividends, stock dividends work a little differently since it involves the issue of shares. To make the dividend payout as smooth as possible, a company issuing stocks as dividends usually set a particular date known as the record date. 

All the shareholders appearing in the Register of Members of a company as of the notified record date will be eligible to receive the stock dividend. Shareholders who don’t appear in the register will not be entitled to the bonus share issue. 

Once the company determines the list of eligible shareholders, the bonus shares are credited to their demat accounts. The actual date of credit is usually a few weeks to a month after the record date. 

In addition to the record date, the company also notifies another date known as the ex-dividend date. It is the date before which you need to purchase the shares of the company to appear in the company’s Register of Members and be eligible for receiving the stock dividend. On this date, the company’s stock starts to trade without the dividend (ex-dividend). 

In the context of the Indian stock market, the ex-dividend date is usually the same as the record date due to the T+1 settlement cycle. 

Stock Dividend - An Example 

Here’s an example to help you understand the concept of how a stock dividend is paid out. 

Assume that a company, say Reliance Industries Limited, declares a stock dividend in the ratio of 1:1. The company sets a record date of July 20, 2023. Due to the T+1 settlement cycle of the Indian stock market, the ex-dividend date also happens to be July 20, 2023. 

To be eligible for this dividend, you need to purchase the company’s shares on or before July 19, 2023. This way, you would receive the shares and be entered in the Register of Members on or before July 20, 2023, making you eligible for the bonus shares. 

Let’s say that you purchase 320 shares of Reliance Industries Limited on July 19, 2023. Thanks to the T+1 settlement cycle, you will receive the shares in your demat account and feature on the company’s Register of Members on July 20, 2023. This would make you eligible to receive 320 bonus shares (1:1) for free. These bonus shares will be credited to your demat account automatically within a month from the record date (by August 20, 2023). 

Conclusion

While most companies tend to distribute dividends by way of cash, some companies opt to issue stocks as dividend payouts. However, unlike cash dividends, stock dividends are very rare. The decision to issue either type of dividend is entirely subject to the company's dividend policy and financial circumstances.

That said, if you don’t hold a company’s stock, but plan on becoming eligible to receive the stock dividend, make sure to purchase the stock before the ex-dividend date. This will ensure that you are present in the company’s Register of Members on the notified record date, making you eligible to receive the stock dividend.