There are two types of dividends a company can issue: cash and stock dividends. Typically only one or the other is issued at a specific period of time (either quarterly, bi-annually or yearly) but both may occur simultaneously. In the case of a cash dividend, a certain amount of money is distributed to each shareholder (e.g., in the case of cash dividend of $0.25 per share, the owner of 100 shares would receive $25 in total). As cash dividends are normally paid to stockholders out of the corporation’s current earnings or accumulated profits their effect is to reduce the equity of the company once issued.
A stock dividend is a pro-rata distribution of additional shares of a company’s stock to owners of the common stock. A stock dividend of 10%, for example, means that for every 10 shares owned, the shareholder receives an additional share. If the company has 1,000,000 shares outstanding (common stock), the stock dividend would increase the company’s outstanding shares to a total of 1,100,000. The increase in shares outstanding, however, dilutes the earnings per share; therefore, all other things being equal, the stock price should decrease.
Note: If you borrow stock to effect a short sale, you are obligated to remit to the lender payments in lieu of the dividends distributed while you maintain your short position.