When successful companies make money, they pay a small portion of that money to the shareholders, who own a portion of the company. This payment is called a dividend. Not all companies pay dividends, and not all dividends are paid in cash. Some companies pay stockholders with additional shares of stock in the company instead of cash, and these are called stock dividends.
There are a few reasons why companies choose to pay dividends in the form of stock instead of cash. One simple reason is that the company may not have the liquid cash available to pay out the dividends. Sometimes stock dividends are paid as a way to benefit stockholders. Whereas cash dividends are taxable, stock holders do not typically have to pay taxes on stock dividends until they sell them. Though issuing this new stock may weaken the value of existing stock, increasing the pool of available stock can ultimately increase the liquidity and thus has the potential to improve its price.
While dividends paid in stock are more rare than those paid in cash, some people prefer stock dividends because they offer investors options. The investor can choose to keep the stock or sell it, depending on the market and overall investing goals. The tax consequences may also make stock dividends more attractive to investors.
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