Common stock pays dividends in three forms: cash, stock, and property. Let us look at each of these.

Cash dividends are those that are paid out in cash form. They are treated as investment income and are taxable in the year they are paid.

Stock dividends are dividends paid out in the form of additional stock shares. They are usually issued in proportion to shares owned.

For example, for every 100 shares of stock owned, a 4 percent stock dividend will yield four extra shares. When the company distributes these new shares to investors, the price of each share decreases to account for the new shares.

This is a recalculation of cost basis. It means that the stock dividends will not be taxed when distributed.

Stock dividends benefit the company by conserving its cash. They benefit the shareholder by increasing his/her number of shares of the company owned.

Property dividends are paid with assets owned by the issuing company. Often the corporation, when paying property dividends, will use securities of other companies owned by the issuer.