What is a stock dividend?

A stock dividend refers to a distribution of additional shares of stock to existing shareholders instead of cash payments. When a corporation issues a stock dividend, it increases the number of shares outstanding while simultaneously reducing the value of each share, since the overall equity of the company remains constant. This can be a way for a company to reward its shareholders without immediately affecting its cash flow.

Issuing a stock dividend can also signal to the market that the company is performing well and has retained earnings it can reinvest or distribute, which can enhance investor confidence. The new shares issued are typically proportionate to the number of shares already held by the investor, maintaining their relative ownership interest in the company.

In contrast, the incorrect options involve different forms of shareholder rewards or company actions that do not represent a stock dividend. Cash payments to shareholders represent a cash dividend, not a stock dividend. A reduction of shares in the market and a buyback of shares by the company are actions that involve the repurchase of existing shares rather than distributing additional shares to shareholders. Therefore, the definition of a stock dividend aligns specifically with the issuance of additional shares to stockholders.