A stock dividend represents a distribution of shares in lieu of or in addition to cash dividends to the existing shareholders. It is popularly known as bonus shares. Stock dividends is capitalization of profit/earnings. This is not distribution of profits to the shareholders, but capitalization of earnings. In case of the companies which have ploughed back a portion of profits over the past years. the reserve would have accumulated to sizeable amount. These funds naturally being to the current shareholders who have abstained from partaking the entire profits. Hence, they legitimately expect issue of further shares free of cost. It represents a further issue of shares as fully paid-up shares without any payment in cash.
There are several aspects of bonus shares. The stock dividend is different from the issue of new stock. If the existing shareholders do not have adequate funds for purchasing new shares, their proportional share ownership declines. But in the cash or bonus shares. Their proportional share ownership remains same.