A dividend in kind, sometimes referred to as distribution in kind, is a stock dividend paid in additional company stock instead of cash, which is more common. Some companies choose to distribute a portion of their earnings to investors in the form of cash dividends. If the company chooses, however, it can issue additional stock in lieu of cash.
As a stockholder, you are entitled to share in the company's growth as it earns money. It is up to the company, however, to decide how it will share earnings with investors. Some companies use earnings to buy back stock or they reinvest their earnings for future growth. If the company chooses to pay a dividend instead, you will receive cash or stock shares representing your portion of the dividend.
As far as taxes are concerned, dividends in kind are treated exactly the same was as cash dividends. Dividends you receive during the year must be reported on your annual income tax returns. When you receive a dividend in kind instead of a cash dividend, your tax will be assessed based on the fair market value of the stock you received at the time the dividend was issued.
When a company issues a dividend in kind instead of cash, they actually increase the number of outstanding stocks. Each stock you own represents a unit of ownership in the company. The percentage of ownership each stock represents depends on how many shares are outstanding. Because issuing a dividend in kind increases the number of outstanding shares, the ownership percentage of each stock is diluted making them slightly less valuable.
Promotes Stock Price Stability
When a company issues dividends, it promotes ownership stability in its stock. Many investors are hesitant to sell a stock when its price declines if they receive steady dividend payments from the company. As a result, stocks that pay regular cash or stock dividends tend to have more stable prices than stocks that do not.
Donald Harder has been writing financial-related articles since 2000 when he founded the firm Securities Research Services. He has worked as a speech writer for the U.S. Department of Justice and written white papers and studies for the U.S. Department of Housing and Urban Development. Harder holds a Master of Arts in international affairs from George Washington University.