Final answer:
A stock dividend is not a true dividend because it is not paid in cash. Instead, shareholders receive additional shares, thereby increasing the number of shares owned but not the total investment value. Stock dividends don't immediately enhance the value of each share like cash dividends do. Option A is correct.
Step-by-step explanation:
A stock dividend is not considered a true dividend primarily because it is not paid in cash. Dividends are typically a direct payment made by a firm to its shareholders, representing a share of the company's profits. Companies like Coca-Cola and electric utilities often offer cash dividends as an incentive for holding their stocks over extended periods.
On the other hand, a stock dividend is issued in the form of additional shares of the company rather than cash. When a stock dividend is distributed, the total value of a shareholder's investment does not immediately increase, but the number of shares owned does.
This dilutes the value of individual shares, but the total value of shares held remains constant. Stock dividends are often expressed as a ratio (like 1 new share for every 10 owned), whereas cash dividends are expressed as a fixed amount per share. While stock dividends do not enhance the value of each outstanding share, over time they may have a positive effect if the company continues to perform well.
Investors can experience returns in two forms: direct cash payments through dividends or capital gains realized when selling shares at a higher price than they were bought. A financial investor, for instance, may purchase a share of stock at $45 and later sell it for $60, achieving a $15 capital gain, which is the increase in the asset's value between purchase and sale.