Stock Dividend

General

Dividends are payments by a company to its shareholders. However, rather than paying in cash, the company distributes additional shares to its shareholders. Critically by doing so it increases the amount of issued shares.

  • The event in which the directors of the corporation distribute a payment to shareholders in the form of shares of stock, as opposed to money, while increasing the number of shares.
  • A stock dividend is a payout of part of a company’s profits in proportion to the number of shares each shareholder owns, paid in the company’s own shares rather than in cash. When a company pays a stock dividend the value of each share of stock is not altered, as it is in a stock split.
  • The reward an investor receives for investing in the company. The higher the dividend, the higher the reward.
  • A non-taxable payment from a company to its shareholders (as opposed to a cash dividend)

Longer Description from the point of view of different market participants

Once the Dividend has been approved, the board of the company will declare the dividend. On the pay date of the event, the issuer will need to make sure that the Paying Agent has (or has access to) the stock for distribution.

The Registrar will need to record all the eligible positions as per close of day Record Date. They will also need to update the share register with the newly issued amount of shares.

The Agent Bank will need to create the Event in the systems of the CSD (or in their own systems) and initiate messaging downstream. Assuming that payment is triggered automatically, the Agent needs to ensure that the stock proceeds are in the account so that all payments can be initiated correctly and on time.

Numbering Agencies need to update the status of the shares to “Ex-Dividend” or something that reflects that the transaction has taken place.

Any exchange that is listing the security will continue to list the security and see a change in pricing on the Ex Date (In theory, the Price will go down with the Dividend Amount which is the theoretical value of the shares in case of a Stock Dividend)

Any index that included the security will continue to include the security in the index. The price of the individual share goes down but the market cap of the company as a whole should stay the same

At CSD level the stock proceeds need to be booked to participants. To effect this, bookings (so Deliveries free of Payment) need to be made to Participants. Open Trades that are in “matched” status as of Record Date of the Stock Dividend need to compensated (Stock Claims), meaning that an additional trade has to be created (Delivery free of Payment) to deliver the stock proceeds from the seller to the buyer. Messaging is generated at the issuer CSD and sent down the chain. The CSD needs to make sure that the stock transactions coming in and out are Reconciling with each other otherwise it would make a loss.

At Custodian level the stock proceeds need to be booked to Clients. To effect this, bookings (so called Deliveries free of Payment) need to be made to Clients. Open Trades that are in “matched” status as of Record Date of the Stock Dividend need to compensated (Stock Claims), meaning that an additional trade has to be created (Delivery free of Payment) to deliver the stock proceeds from the seller to the buyer. Messaging is received from the Issuer CSD (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. The Custodian needs to make sure that the stock transactions coming in and out are Reconciling with each other otherwise it would make a loss.

At Broker level the stock proceeds need to be booked. To effect this, bookings (so called Deliveries free of Payment) need to be made to Clients. Open Trades that are in “matched” status as of Record Date of the Stock Dividend need to compensated (Stock Claims), meaning that an additional trade has to be created ( Delivery free of Payment) to deliver the Stock Proceeds from the seller to the buyer. Messaging is received from the Custodian (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. The Broker needs to make sure that the stock transactions coming in and out are Reconciling with each other otherwise it would make a loss.

If the stock is on loan or held as collateral, then both the stock lending brokers (or all 3 if it’s 3rd-party lending) and collateral agents need to effect the transaction in their books. Stock may have to be recalled before the important dates of the event. When it comes to a Stock Dividend the amount of outstanding shares may simply be increased in both the lender as well as the borrower’s books.

Fund Manager need to include the change in the fund accounting and possibly in the NAV (especially if the Pay Date is after the Ex Date). Or if the Fund Manager uses a Transfer Agent, then this is a task for the Transfer Agent.

    • In case the fund manager uses a Transfer Agent, then the transfer Agent needs to handle the transactions as a result of the Dividend.
    • These transactions need to be included in investment statements that are sent to investors also.
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Vendors will have to update their systems with the correct information for the security and send messaging to their clients about it.

    • At Retail Bank level the additional shares need to be booked into Beneficial Owners Accounts. To effect this, bookings (free of payment) need to be made to Participants. Open Trades that are in “matched” status as of Record Date of the Stock Dividend event need to compensated (stock claims), meaning that an additional trade has to be created (free of Payment) to deliver the additional shares from the seller to the buyer. Messaging is received from the higher up in the chain (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. What is interesting to see here is that this seems to be the End Point for Swift Messaging as a means to inform underlying clients. At this level it’s often just a text message or a short description with the event and a reference to where source documentation can be found (online).
    • When the beneficial owner holds the securities through for example a Fund or an ETF, then the Retail Bank does in that case not need to take action on the event (it’s part of the fund manager’s tasks)

Beneficial owner will have to take note of the changes and reconcile these within their systems (if applicable). This can via real time messaging that they may receive, but it should also be in their periodic investment statements.

Other aspects

    • For the company the main advantage is that when the company’s cash position is inadequate for paying out cash dividends, they can pay their shareholders in shares.
    • For both the investor as well as the company, another main advantage is that there are usually no tax consequences until the shareholder sells the shares. A cash dividend would be considered as income in the year it is received. For shareholders holding their investments in “tax-wrapper” accounts this is positive.
    • The company might aim to increase liquidity of its shares by issuing more shares and by doing so reducing the value of the shares (this is not always the case)

The source of the distributed shares should be that they are newly issued shares.

  • CAEV
    • DVSE
  • CAMV
    • MAND
  • CAEP
    • DISN
  • CAOP
    • SECU
  • Qualifier CAEV = DVSE 
  • CAOP = SECU
  • Mandatory event => field 22F: CAMV = MAND

The Issuer will finalise its Income Statement and the Board of Directors review the financials. Based on the results they will formulate a Dividend Policy and derived from that a suggested dividend amount for the next Dividend Payment. This Dividend Payment is then one of the voting points in the General Meeting. In the case of the Board proposing a Stock Dividend this is usually because there is not enough liquidity in the company to pay out the dividend in cash. Therefore – as an alternative – a payout in stock may be suggested.

  • Announcement Date
  • Declaration Date
  • Ex Date
  • Record Date
  • Paydate
  • Sese.025
  • Seev.031
  • Seev.036

!!Important!! You should contact your own Tax Advisor for your specific Tax queries. No rights can be derived from any information on this website or from any of the websites that the below text links to. This topic is included for Information purposes only.

As a starting point it may be good to notice the different names for Taxes that could potentially be involved (depending on jurisdiction):

  • Capital Gains Tax (CGT) – Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive. More information about Capital Gains Tax can be found here for several countries: https://en.wikipedia.org/wiki/Capital_gains_tax. Capital Gains Tax does NOT usually apply to Dividend Payments if the Dividend is paid in Cash.
  • Withholding Tax – a tax deducted at source, especially one levied by some countries on interest or dividends paid to a person resident outside that country. A list of Withholding Taxes around the world can be found here. https://www.dlapiperintelligence.com/goingglobal/tax/index.html?t=17-withholding-tax
  • Dividend Tax – A dividend tax is the tax imposed by a tax authority on dividends received by shareholders (stockholders) of a company. Under most Jurisdictions, Dividend Tax is a form of Income Tax and taxed accordingly at the individual level.
  • Income Tax – Income tax is a tax that governments impose on income generated by businesses and individuals within their jurisdiction. It’s often charged at different rates depending on the source of income and the individuals total earnings. To get an idea about different tax rates charged around the world, please check this table: https://home.kpmg/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online/individual-income-tax-rates-table.html. Note that these rates can change in time. Note that there may be several layers of taxing authorities, for example; federal and provincial.
  • Stamp Duty – a tax that is charged in the UK and may be applicable to Corporate Action Events, like for example a Dividend Reinvestment Plan. More information can be found here: https://www.gov.uk/tax-buy-shares

There is no Tax payable by either the issuer or the shareholder.

Open trades that are in “matched” status on Record Date will be compensated, meaning that additional trades will be created to compensate the buyer who is entitled to the stock proceeds of the dividend.

With ratios often being 1 new for every “n” held, it is likely that there will be many fractional entitlements to the new shares. This applies to both the entitlements on settled balances as of Record Date as well as on Claim Trades. Fractions can be handled in 3 ways and are often only processed at “omnibus account level”:

  • Round Down (SWIFT RDDN)
  • Round Up (SWIFT RDUP)
  • Cash Compensation (SWIFT COMP) → Partial share entitlements are compensated by a cash amount, effected through so called “PFOD” (Payment free of Delivery) trades.

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