What characterizes a stock dividend?

A stock dividend is characterized by the issuance of additional shares to existing shareholders without any cost. When a company announces a stock dividend, it essentially increases the number of shares outstanding while maintaining the overall value of the company. Shareholders receive these additional shares based on the number they already hold, which can be an attractive incentive, particularly in a growing company.

The issuance of stock dividends does not involve cash payments (which would correspond to cash dividends) and does not create any liabilities that would require repayment, as seen in scenarios like loans. This mechanism allows shareholders to increase their shareholdings and can be a tax-efficient way for companies to reward investors without affecting cash flow. Additionally, it is distinct from any dividends received from government bonds or similar fixed-income investments, which do not involve the issuance of new shares. The core nature of stock dividends is that they are issued at no cost to shareholders, reinforcing the idea that option B accurately captures the essence of what a stock dividend represents.