Some firms pay stock dividends in addition to or in lieu of cash dividends. Stock dividends are a form of recapitalization and do not affect the assets and liabilities of the firm.
There is a misconception that stock dividends increase the ability of the firm to grow. Many investors believe that stock dividends preserve cash and actually allow the firm to reinvest more for growth. Because of this belief many stocks trade higher after paying a stock dividend. However, stock dividends do not increase the earning power of the company.
In the US, if an investor receives additional shares from a stock dividend (and the investor does not have the option to take the dividend in cash), there is no tax consequence until the investor sells the stock.
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