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Explanation of Stock dividends
Also called Cash Dividends or Stock Dividends, and listed on the Cash Flow Statement, Dividends are the cash the company has decided to distribute to shareholders.
Importance of Stock dividends
The payment of dividends to shareholders is always a sensitive issue. On the surface, the company could be doing a favorable thing for investors by distributing payment of dividends. This attracts more stock investors and can actually help raise the stock price. However, this is cash that comes from the company’s Retained Earnings, and therefore the available cash reserves for reinvesting in the company are lessened. This could result in the company earnings and possibly the stock price not appreciating much over time.
Generally you can expect newer and startup companies in emerging industries to not pay dividends since they need all their earnings to help grow the company, while established “Blue Chip” companies whose growth rates are typically much lower regularly pay dividends to shareholders. If a company changes its dividend payout amount, you will have to weigh the negative and positive effects of this change.