Is a Split Stock Affected in the Form of a Dividend?

Corporations largely authorize stock splits for cosmetic purposes. For example, management may reason that its stock looks more attractive to investors at $50 per share than it would at $100. Aside from setting an arbitrary share price, a stock split has no economic value in terms of the size of your overall investment or dividend payment.

Identification

• A stock split simultaneously increases a corporation's outstanding share balance while also cutting its price. For example, Corporation X may trade for $100 per share immediately before it executes its two-for-one stock split. When the stock splits, Corporation X investors receive two shares at $50 -- for each share of stock that they originally held at $100. Before the stock split, you may have owned 10 shares of Corporation X at $100 -- for a total investment of $1,000 ($100 x 10). After the stock split, you would own 20 shares at $50, and your investment would still be worth $1,000.

Features

• Dividends are generally paid out quarterly and quoted in per share amounts. After a stock split, the nominal dividend quote must also be reduced. Immediately before the stock split, $100 Corporation X had authorized a $2 per share quarterly dividend. At that point, you were set to collect $20 in dividend payments on your 10 shares. After the stock split, Corporation X would offer a $1 per share quarterly dividend on its $50 stock. At that point, you would still be set to collect $20 worth of total quarterly dividends on your initial investment.

Considerations

• Stock splits have no impact on dividend yield. To calculate dividend yield, you divide a stock's expected annual dividend payment by its current share price, and take that number as a percentage. Before the split, Corporation X featured an 8 percent dividend yield ($8 annual dividend payments / $100 share price). After the split, Corporation X still carries an 8 percent dividend yield -- with $4 worth of expected annual dividends on a $50 stock.

Tax Consequences

• Stock splits have no tax consequences on dividend income. For tax purposes, dividends are categorized into either qualified or ordinary dividends. As of 2010, ordinary dividends are taxed at ordinary income rates, which are listed as 10, 15, 25, 28, 33 and 35 percent. Qualified dividends, however, are either tax-free or taxed at maximum 15 percent rates.

  For qualified dividends, you must own shares of stock for more than 60 out of the 120 days surrounding their ex-dividend date. You must buy and hold shares before and through their ex-dividend date to receive dividends on their payable date.

Warning

• A corporation is under no legal obligation to make good on dividend promises. You should read through annual reports to determine whether a corporation's dividend is secure. Flagging sales, high debt levels, and minimal cash balances often foreshadow a dividend cut and ultimately, corporate bankruptcy. A dividend cut may even accompany a reverse stock split. In a reverse stock split, your share price would double, but your number of shares owned are also reduced by half.