Woody owns 10% of Arlo’s 6% cumulative preference shares of $100 par (i.e. Woody’s holding of 2,000 shares out of the total of 20,000 shares). In 20X6 Arlo declared and paid dividend of $240,000. This payout is for both 20X5 and 20X6, dividend for each year being $120,000 (i.e. 6% x 20,000 shares x $100 par). Woody has a claim for dividend only when declared. No dividend was declared in 20X5. There was no liability for Arlo and consequently no dividend income could be recognized by Woody. In 20X6, dividend for both years has been declared and Woody will recognize dividend income for both 20X5 and 20X6. Woody’s share in dividend income would be 10% of $240,000 = $24,000. This can also be calculated as 6% x 2,000 shares x $100 par x 2 years.
A stock dividend does not involve distribution of cash. Rather, Arlo would only distribute more shares, 5% in this case, of its stock. Each stockholder would get additional shares in proportion to their holding. Accordingly, for the 1,000 common stock held by Woody, an additional 50 shares would be received the value of which is $500 (i.e. 50 shares x $10 market price). While the number of shares held increases, this is not recognized as dividend income.