when a company issues additional stock shares for any reason the result is stock dilution more shares in circulation means a reduction in the earnings per share eps of the existing shares and in the ownership percentage held by each current shareholder 
dilution is a downside of a stock dividend if the company s net income does not increase proportionately an example of share dilution is as follows the company rewards investors while keeping its cashthe decrease in share price may attract new investorsinvestors do not owe tax on these dividends until the stock is soldbonus shares dilute the share pricestock dividends may signal a company s financial instabilityshare dividends are less attractive than cash dividends to some shareholdersadvantages and disadvantages of stock dividendsfrom an investor s viewpoint receiving stock dividends yields little immediate reward then again there s no tax due until the additional shares are sold issuing share dividends lowers the price of the stock at least in the short term a lower priced stock tends to attract more buyers so current shareholders are likely to get their reward down the road or they can sell the additional shares immediately pocket the cash and still retain the same number of shares they had before a public company is not required to issue dividends on common stock however it s not a good look for a company to abruptly stop paying dividends or pay less in dividends than in the past for the company a stock dividend is a pain free way to issue dividends without depleting its cash reserves journal entries for stock dividends