A stock split is when a company creates more shares out of existing shares and in the process reduce its share price to make the shares more affordable to purchase by shareholders and investors.

The company’s overall value stays the same while dividing its existing shares into greater number of smaller, less expensive shares.

The stock split ratios for example a 2-for-1 split means every existing share (1) is divided by 2 resulting to 2 shares. So, if you own 10 shares worth $10.00 each before the split in this hypothetical example, after the 2-for-1 split, you will own 20 shares with each share worth $5.00 each.

Company Stock Splits Example:

COMPANY STOCK SPLITS	BEFORE	AFTER
2:1	1 Share for $50.00	2 Shares for $25.00
3:1	1 Share for $60.00	3 Shares for $20.00
4:1	1 Share for $80.00	4 Shares for $20.00

REASONS FOR STOCK SPLITS

Why would a company want to double or triple its outstanding stock shares if its market capitalization won’t be affected?

There are a number of reasons for stock splits. However, there are two that are most common. The first has to do with perceived company liquidity. With each share’s price dropping a certain percentage – depending on the ratio that the company decides to use – investors tend to see the company’s stock as more affordable, and therefore may be more likely to buy shares. The lower the share price, the less risky the stock seems.

A stock split makes the stock more affordable for more investors and thus can be used to draw in new investors who may have been reluctant or simply unable to purchase the stock at its higher, pre-split price.

The move is a useful strategy when a company’s stock price rises to a level that prices many investors out, or when the price has risen significantly higher than its competitors’ stock.

Stock splits can be a lucrative and important step for companies looking to draw in more investors. This is particularly true for companies that are experiencing rapid growth. A company that is growing or believes it will grow may choose to split their stock, giving a positive indication of growth to investors and shareholders, which ultimately helps it grow.

How Does a Stock Split Affect Cash Dividends?

If the stock split happens after the date of record, then the dividend is paid out as normal and there is no impact on the payout.

If the stock split happens before the date of record, then the dividend’s total dollar value will stay the same, but the per-share price will be adjusted to reflect the increased number of shares after the stock split.

What Happens to Dividends After a Stock Split?

When a company decides to issue a stock split (or stock dividend), any upcoming cash dividends can be affected in a couple of ways. In most cases, the dividend will be adjusted along with the share price. The factors to consider are the date of the stock split and the time of the cash dividend’s record date.

• A dividend, or cash payment made periodically by a company, is impacted by a stock split depending on the dividend’s date of record, or the date on which one must be a shareholder to receive a dividend.
• If the stock split happens after the date of record, then the dividend is paid out as normal and there is no impact on the payout.
• If the stock split happens before the date of record, then the dividend’s total dollar value will stay the same, but the per-share price will be adjusted to reflect the increased number of shares after the stock split.

Do stock splits affect dividends?

In general, dividends declared after a stock split will be reduced proportionately per share to account for the increase in shares outstanding, leaving total dividend payments unaffected. The dividend payout ratio of a company shows the percentage of net income, or earnings, paid out to shareholders in dividends.

Stock Splits After the Record Date

A stock split is an action taken by a company to divide its existing shares into multiple shares. For instance, if a stock is trading at $100 per share and the company initiates a two-for-one stock split, a holder of 100 shares before the split will hold 200 shares at $50 per share after the split. The split is cosmetic in nature and does not affect the value of the holdings.

Typically, a cash dividend will not be issued to new shares that were created from a stock split if the split date occurs after the dividend’s date of record. This is similar to how an investor does not receive dividends for stocks that were purchased after the dividend’s record date.

For example, suppose XYZ Corp. has set aside $2.5 million and plans to pay a $2.50 dividend on June 8 to all of its shareholders on record as of June 1 where there are one million shares outstanding. Furthermore, the stock is planning to have a two-for-one stock split on June 6. Since the split happens five days after the record date, all those newly created shares will not be eligible for the dividend on June 8.

Stock Splits Before the Record Date

As for situations when the stock split occurs before a dividend record date, the dividend will, for the most part, be paid out for the newly created shares as well. Except that the dividend likely will be split compared to previous time periods. This is due to the fact that companies want to maintain the number of dividends issued.

For example, suppose that XYZ Corp has set aside $2.5 million and plans to pay a quarterly $2.50 dividend on June 8 to all of its shareholders on record as of June 1, when there are initially one million shares outstanding. But the board of directors authorized a stock split on November 31, meaning the holders of the one million shares outstanding will now be the holders of two million shares outstanding. As a result, the company will be taking the $2.5 million and then issuing a $1.25 dividend to the holders of its two million shares outstanding. The shareholders still receive the same dividend payout they would have before the stock split; it’s just split because the shares were doubled.

Typically, to avoid complication, a company will not issue dividends and split its stock around the same time. Effectively though, in situations where a dividend and a split occur, the shareholders who hold throughout this period will be paid the same amount in total dividends whether there was a split or not.