A cash dividend is a payment made by a company out of its earnings to investors in the form of cash (check or electronic transfer). This transfers economic value from the company to the shareholders instead of the company using the money for operations. However, this does cause the company's share price to drop by roughly the same amount as the dividend
For example, if a company issues a cash dividend equal to 5% of the stock price, shareholders will see a resulting loss of 5% in the price of their shares. This is a result of the economic value transfer.
What Is a Stock Dividend?
When a company declares to issue new share to his existing share holders as dividend instead of cash is known as stock dividend. Companies may decide to distribute this type of dividend to shareholders of record if the company's availability of liquid cash is in short supply. These distributions are generally acknowledged in the form of fractions paid per existing share, such as if a company issued a stock dividend of 0.05 shares for each single share held by existing shareholders.
For example, if a company was to issue a 5% stock dividend, it would increase the amount of shares by 5% (one share for every 20 owned). If there are one million shares in a company, this would translate into an additional 50,000 shares. If you owned 100 shares in the company, you'd receive five additional shares.