An AM stock dividend is a payment a company makes to shareholders in the form of additional shares of stock, rather than cash

When a company declares an AM stock dividend (sometimes called a stock split dividend or scrip dividend), it sends you new shares instead of a check. The number of new shares you receive depends on how many shares you already own and the dividend ratio the company sets. For example, if a company declares a 1-for-2 AM stock dividend and you own 100 shares, you would receive 50 additional shares.

The key difference from a cash dividend is that your total ownership stake in the company stays roughly the same percentage-wise, but you now hold more individual shares. The company's total value does not change either — it is straightforward divided into more pieces. This is different from a stock split, which also increases share count but is not technically a dividend payment.

Key Takeaways

  • An AM stock dividend gives you additional shares of stock instead of cash, based on a ratio set by the company's board.
  • Your percentage ownership in the company does not change, but the number of shares you hold increases.
  • The share price typically adjusts downward on the ex-dividend date to reflect the increased number of shares outstanding.
  • You do not owe income tax on an AM stock dividend until you sell the shares, unlike a cash dividend which is taxable in the year received.
  • AM stock dividends are less common than cash dividends and are often used by companies that want to preserve cash or reward long-term shareholders.

How the share price adjusts after an AM stock dividend

When a company issues an AM stock dividend, the stock price drops on the ex-dividend date — the date by which you must own the stock to receive the dividend. This price adjustment is automatic and reflects the fact that there are now more shares outstanding. If a stock trades at $100 per share and the company declares a 1-for-2 AM stock dividend, the price will typically fall to around $50 per share after the dividend is paid.

This adjustment protects both existing and new shareholders from an artificial gain or loss. Without it, shareholders would see their share count increase while the total value of their position stayed the same, which would look like a windfall. The price drop ensures that the total market value of your position remains unchanged when ready after the dividend is issued.

Over time, the stock price may move up or down based on the company's performance and market conditions, just as it would without a dividend. The AM stock dividend itself does not create or destroy value — it straightforward reorganizes the existing value into more shares.

Tax treatment of AM stock dividends

An AM stock dividend is generally not a taxable event in the year you receive it. Unlike a cash dividend, which you must report as income on your tax return, an AM stock dividend does not trigger a tax bill when the shares arrive in your account. The IRS treats it as a non-taxable distribution that adjusts your cost basis in the stock.

Your cost basis is the original price you paid for your shares, adjusted for any stock splits or dividends. When you receive an AM stock dividend, your total cost basis stays the same, but it is now spread across more shares. For example, if you bought 100 shares at $50 per share (total basis of $5,000) and receive a 1-for-2 AM stock dividend, you now have 150 shares with a total basis of $5,000, or about $33.33 per share.

You will owe tax only when you sell the shares. At that point, you calculate your gain or loss based on the sale price minus your adjusted cost basis. Keeping records of all AM stock dividends you receive is important for calculating the correct basis when you eventually sell.

Why companies issue AM stock dividends instead of cash

Companies choose AM stock dividends for several reasons. The most common is to preserve cash. A company that wants to reward shareholders but needs to keep money on hand for operations, debt repayment, or investment might issue stock instead of paying out cash. This lets the company return value to shareholders without reducing its bank balance.

AM stock dividends can also signal confidence in the company's future. By issuing new shares, the company is betting that the stock price will rise over time, making those new shares valuable. Some companies use them to reward long-term shareholders while discouraging short-term traders, since holding more shares makes it harder to exit a position quickly.

In rare cases, a company might issue an AM stock dividend when it does not have enough cash to pay a regular dividend but wants to maintain the appearance of returning value to shareholders. This is less common in the United States, where cash dividends are the norm.

AM stock dividends versus cash dividends

The main difference between an AM stock dividend and a cash dividend is what you receive. With a cash dividend, the company sends you money — usually deposited directly into your brokerage account. With an AM stock dividend, you receive additional shares. Both reduce the company's retained earnings, but they affect your account differently.

Cash dividends are taxed in the year you receive them, while AM stock dividends are not taxed until you sell. This can make AM stock dividends more tax-efficient if you plan to hold the stock for many years. However, cash dividends give you when ready liquidity — you can spend the money or reinvest it however you choose. AM stock dividends lock the value into shares, which you must sell if you want cash.

From the company's perspective, a cash dividend requires actual cash to be paid out, while an AM stock dividend costs nothing except the administrative work of issuing new shares. This is why companies facing cash constraints often choose stock dividends over cash.

How to record AM stock dividends on your tax return

You do not report an AM stock dividend as income on your tax return in the year you receive it. Instead, you adjust your cost basis for the shares you already owned. When you eventually sell any shares — whether the original ones or the new ones from the dividend — you will report the gain or loss on Schedule D (Capital Gains and Losses).

Your brokerage will track the cost basis automatically if you bought all your shares through them. However, if you bought shares at different times or through different brokers, you may need to calculate the adjusted basis yourself. Keep records of the ex-dividend date, the number of shares received, and the fair market value of the stock on that date, as this information may be needed to support your basis calculation if the IRS ever questions it.

If you receive an AM stock dividend from a company whose stock you own in a retirement account like a 401(k) or IRA, the dividend is not taxable at all — neither when received nor when you sell. The tax treatment depends on the account type and when you withdraw money from it.

Frequently Asked Questions

Do I have to do anything when I receive an AM stock dividend?

No. The shares are deposited automatically into your brokerage account, and your broker handles all the paperwork. You do not need to take any action. Your broker will also adjust your cost basis records automatically, though you should verify this for your own records.

Can I choose to receive cash instead of an AM stock dividend?

Not usually. When a company declares an AM stock dividend, all shareholders receive it in the same form. Some companies offer a dividend reinvestment plan (DRIP) that lets you choose whether to receive future cash dividends as shares or cash, but this does not explore to stock dividends already declared.

What happens to my AM stock dividend if I sell the stock before the ex-dividend date?

You will not receive the dividend at all. If you sell before the ex-dividend date, the new owner receives the shares instead. This is why the ex-dividend date matters — you must own the stock on that date to be may have access to to the dividend.

How do I calculate my cost basis after receiving multiple AM stock dividends?

Your total cost basis never changes — it stays at what you originally paid for the stock. Each time you receive an AM stock dividend, you spread that same total basis across more shares. If you need the exact per-share basis, divide your total original cost by the total number of shares you now own after all dividends.

Is an AM stock dividend the same as a stock split?

They are similar but not identical. Both increase your share count and lower the per-share price. The main difference is that a stock split is a corporate action that does not involve a dividend payment, while an AM stock dividend is technically a dividend paid in shares. For tax purposes, they are treated the same way — neither is taxable in the year it occurs.