Difference Between Bonus Shares and Stock Dividend
Bonus shares are additional shares given to existing shareholders without any extra cost, drawn from a company’s reserves. This increases the number of shares you own but doesn’t change the overall value of your holdings.
On the other hand, a stock dividend is a payment made in the form of additional shares, typically issued from the company’s profits.
What is Bonus Share?
Bonus shares are additional shares that a company gives to its existing shareholders without any extra cost. These shares are given out based on the number of shares a shareholder already owns. For example, if a company issues a bonus share at a 2:1 ratio, it means that for every two shares a shareholder owns, they will receive one additional share as a bonus.
Why Do Companies Issue Bonus Shares?
Companies usually issue bonus shares to reward their shareholders. It’s a way of sharing profits with investors without paying cash dividends. This is often done when a company wants to reinvest its profits back into the business but still wants to acknowledge its shareholders. Bonus shares also make the stock more affordable by increasing the number of shares available, which can attract more investors.
Impact on Shareholders
When bonus shares are issued, the overall number of shares increases, but the value of each share decreases proportionately. This is because the company’s total value remains the same, but it’s now divided among a larger number of shares. However, shareholders benefit by holding more shares, which could be advantageous if the company’s stock price appreciates over time.
How Does It Affect the Company?
For the company, issuing bonus shares does not involve any cash outflow, so it doesn’t affect the company’s liquidity. However, it can lead to a dilution of the stock, which might temporarily lower the stock price. Despite this, companies often use bonus shares as a strategy to boost market confidence and encourage long-term investment in their stock.
What is Stock Dividend?
A stock dividend is a type of dividend payment made by a corporation to its shareholders in the form of additional shares of stock rather than cash. This means that instead of receiving a cash payout, you get more shares of the company. The company’s total number of shares increases, but the value of each share typically decreases proportionally, leaving the overall value of your holdings the same.
How Does a Stock Dividend Work?
When a company decides to issue a stock dividend, it distributes additional shares to existing shareholders based on the number of shares they already own. For example, if a company declares a 10% stock dividend, you would receive one extra share for every ten shares you hold. Stock dividends are often expressed as a percentage, such as a 5% or 10% dividend.
Why Do Companies Issue Stock Dividends?
Companies might choose to issue stock dividends instead of cash dividends for several reasons:
- Preserving Cash: Companies may want to conserve cash for future investments, paying down debt, or other financial needs.
- Positive Signal: Issuing a stock dividend can signal that the company is confident in its future growth, as it provides more shares to its investors.
- Appealing to Shareholders: Some investors prefer stock dividends because they allow for potential capital appreciation if the stock’s value increases over time.
Impact on Shareholders
For shareholders, receiving a stock dividend can be beneficial, especially if they believe in the company’s long-term growth. However, it’s essential to understand that while you may own more shares after a stock dividend, the value of each share usually decreases proportionally, so the total value of your investment remains unchanged initially.
Over time, the value of the additional shares may increase, offering potential gains.
Comparison Between Bonus Shares vs Stock Dividend
| Parameter of Comparison | Bonus Shares | Stock Dividend |
|---|---|---|
| Definition | Free additional shares given to existing shareholders. | A dividend paid in the form of additional shares rather than cash. |
| Purpose | To increase the liquidity of shares by expanding the number of shares. | To distribute profits to shareholders while retaining cash within the company. |
| Impact on Share Capital | Increases the number of outstanding shares. | Increases the number of outstanding shares. |
| Impact on Share Price | The share price usually decreases proportionally to the bonus issue. | The share price usually decreases proportionally to the stock dividend. |
| Tax Implications | Generally not taxable when received. | May have tax implications depending on jurisdiction, often taxed as a regular dividend. |
| Impact on Ownership | Does not change the percentage of ownership. | Does not change the percentage of ownership. |
| Shareholder’s Perspective | Viewed as a positive sign, indicating confidence in future prospects. | Viewed as a positive sign, indicating that the company has earnings but prefers to retain cash. |
| Company’s Perspective | Used when the company wants to reward shareholders without depleting cash reserves. | Used when the company has profits but prefers to reinvest rather than distribute cash. |
| Example | A company issues 1 bonus share for every 5 shares held. | A company issues a 10% stock dividend, giving 1 additional share for every 10 shares held. |