How Do Stock Splits Affect Dividends?
Stock splits occur when a company divides its existing shares into multiple new shares to boost liquidity. While this maneuver does not inherently change the company’s market capitalization or overall value, it can affect dividends in several ways, particularly from the perspective of Dividend Growth Investing.
Impact on Dividend Per Share
After a stock split, the dividend per share is adjusted proportionally. For instance, if a company announces a 2-for-1 split and previously paid a dividend of $2 per share, post-split, the dividend would adjust to $1 per share. Although individual dividends appear lower, total dividends received by shareholders remain unchanged if they hold the same number of shares before and after the split.
Perception and Market Reaction
Stock splits can enhance the attractiveness of shares, particularly for retail investors, resulting in increased demand. This, in turn, can drive up the stock price. Higher share prices may lead companies to reevaluate their dividend policies, potentially resulting in future dividend increases. This anticipated growth is appealing to dividend growth investors.
Long-term Considerations
While immediate dividends may be diluted post-split on a per-share basis, a company that continues to perform well and increases its overall dividend payout over time can offer significant returns. Thus, investors should focus on the company's underlying fundamentals and growth potential rather than solely on the nominal downshift in dividends following a split.