What is a stock dividend?
It's a dividend payment that a company gives to its existing stakeholders, from the profit or earnings it has made during a financial year, which is paid in additional shares rather than cash. They're also called scrip dividends or bonus shares.
Where have you heard about stock dividends?
You may hear about companies issuing stock dividends instead of cash dividends if they want to reward their investors but they either has a short supply of capital available or they want to use any existing liquidity to reinvest in the business.
What you need to know about stock dividends...
If a company allocates additional stock to its stakeholders it doesn't increase the total value of the company; instead it reduces the value of each share.
With a 10% stock dividend you may end up with 110 shares instead of 100, but because the amount of shares in the company has increased proportionately, the value of these shares will have gone down by 10%. So, ultimately, the total value of your shares hasn't changed.
An advantage of stock dividends, as opposed to cash dividends, is that you won't pay tax on your stock dividends until you sell your shares. You also have the benefit of choice; you can choose to either keep the shares and hope that the company will use the capital to reinvest and earn a better rate of return or you can decide to sell some or all of the new shares and make your own cash dividend.