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Greetings Sam,

One of my very high risk companies (a holding company) announced that it was going to pay a stock dividend consisting of 1 share of company X for every 6 shares held of company y. They also said in a press release that the shares would be restricted for a year. What exactly does this mean and can anyone shed some more light on any special circumstances that this kind of dividend would entail (taxes etc...) ?

Assuming X and y are separate companies:

It means that there is a spin-off of the parent and where you'd get 1/6th of a share in the new company for each share in the old company. If you want some examples to explore, here are a few ideas, http://www.forbes.com/2001/01/10/0110sf.html notes a few in itself but here are a few more:

1) Ford which has had a couple of spin-offs. http://www.ford.com/en/company/investorInformation/stockInformation/stockSpinoffs.htm has the details there that you could use as an example.

2) GM which has had a couple of spin-offs too. http://www.gm.com/company/investor_information/stock_perf/stock_splits.html

3) Lucent has had a few too.. http://www.lucent.com/investor/spin.html notes them.

http://www.fool.com/school/taxes/1999/taxes990326.htm is an old article that details some of these things too.

And when a penny stock does this, is it a good sign (i am assuming it is) or could it somehow lead to a reverse split sometime in the future (not the first time it would happen for this company), BTW this is funny money for me I like to think i have diversified portfolio, that is not relying on this one stock.

Think of this as a reverse merger, so that there is a new company that gets valued separately from the parent. The reason for the one year lock-up is that this allows time for the new stock to find its footing in a sense.

HTH,
JB
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