Helping your mother remove the dinner dishes from the table, she tells you about the dividends from her spinoff stocks. Unfamiliar, you ask: How does a spinoff dividend work? Read on to hear her unlikely answer…

How Does a Spinoff Dividend Work?

How a spinoff dividend works is a company separates a division or subsidiary into an independently operated business and distributes the newly created spin out shares to its existing shareholders. The distribution is considered a dividend. How does a spin dividend work? Here’s what mother said:

Spinoff, The Corporate Action – A company divests of a subsidiary or a division and forms a new standalone entity. The parent firm, the company creating the spinoff, may have decided to initiate this corporate action to enhance operational efficiency driving shareholder value.

New Spinoff Creation – The spinoff is an independently operated entity. The parent firm transfers assets, liabilities, specific debt obligations, and, occasionally, employees to the spinoff.

Share Distribution – The parent firm distributes spinoff shares, as a dividend, to existing parent company shareholders. Share distributions are made in proportion to the existing shareholder’s parent stock ownership.

The distribution exchange ratio can be 1:1 meaning a parent shareholder would receive one spinoff share for every one parent share owned. Exchange ratios vary and are detailed in the spinoff public announcement and in the Securities and Exchange Commission (SEC) prospectus filed by the parent company.

Trading – The spinoff begins trading publicly under its own ticker symbol once all spinoff shares have been distributed. Shareholders can sell their shares or can hold on to them anticipating future appreciation.

Tax Treatment – Spinoff dividends are tax jurisdiction and ownership dependent. Which tax jurisdiction and whether the dividends are distributed within a tax-free retirement account may have tax implications. The prudent investor consults a tax professional prior to receipt of any disbursements.

How does a spinoff dividend work? A spinoff dividend works as a transfer of fractional ownership to parent company shareholders.

What is the Difference between a Spinoff and a Stock Dividend?

The difference between a spinoff and a stock dividend is a spinoff dividend is the distribution of a newly formed entity’s shares and a stock dividend is the distribution of additional shares of an existing company.  Here’s more:

Spinoff Dividend – A company splits or spins off a portion of itself and forms a separate operating company. The parent firm then distributes spinoff shares as dividends to its parent firm shareholders on a pro rata basis. The spinoff is an independent entity with its own board, management, assets, liabilities, and employees.

Stock Dividend – Stock dividends are additional shares issued by an existing company to its current shareholders of record. These are not issued shares of a new spinoff. Stock dividends are also issued on a pro rata basis, meaning existing shareholders receive additional shares in proportion to their parent stock ownership.

How does a spinoff dividend work? A spinoff dividend works as a method of transferring value to shareholders through spinoff share ownership.

Read next: Is a Spin-Off the same as an IPO?

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