Below, Dividend.com discusses how stock splits affect dividends. We begin with understanding exactly what stock splits are, and how the timing of the ex-dividend date, the record date and the stock split could affect investors.
What Is a Stock Split?
A stock split is a corporate action taken to renew investor interest by dropping the price of a share if it’s too high and increasing liquidity to theoretically have a positive impact on the share price, at least in the short run.
For example: Assume ABC Corp has 10 million shares outstanding and are trading for $100. That brings it to a market cap of $1 billion. The company decides to do a 2 for 1 stock split, which brings the share outstanding to 20 million, reducing the share price to $50. The market cap remains the same at $1 billion.
Stock Split After Record Date
Assuming the above date sequence for ABC Corp, if the company decided to pay a dividend of $1 per share, it will equate to $10 million of distributions. Let’s assume the stock split on 2016-05-10, 2 days before the pay date (but 13 days after the record date). Investors who purchased the shares one day before the ex-dividend date on 2016-04-24 will get their names in the record books of the company and be paid on 2016-05-12.
Since the new shares are created after April 27, 2016, they will not be eligible for the dividend.
Stock Split Before Record Date
If the company issues a dividend before the record date, then it will be given to the newly created shares. In the above example, if we assume that the 2 for 1 stock split happened before the record date of 2016-04-27, but after the ex-dividend date of 2016-04-25, then the dividend will be paid on 20 million shares instead of 10 million shares. If the original distribution was going to be $1 per share on 10 million shares ($10 million), it would still remain $10 million of distribution but on 20 million shares, which would be $0.5 per share distribution.
The Bottom Line
Stock splits before record date for an investor mean more shares in his account and less dividend per share. Stock splits after the record date mean the same dividend per share on the same number of shares that an investor is holding. In both cases, the actual payout received in dollars is going to be the same. It’s only the number of shares that an investor has in his account that might change if he/she is still holding the stock post the ex-dividend date.
Reverse stock splits also have the same impact except that the number of shares and the dividend per share would increase instead of decrease, if the reverse split happens before the record date, but after the ex-dividend date. It has no impact on the payout if the reverse split happens after the record date.
Find our complete guide on all the dates that an investor should know when he is dividend investing here.