EP125: Stock Splits Explained – What Investors Need to Know

Stock splits can quietly turn a small investment into a surprisingly large one — yet most investors don’t really understand how they work. And if a company you own announces a split, what should you actually do?

Today, we’re discussing stock splits and reverse splits in plain English, and we’ll also look at Coca‑Cola’s remarkable split history to show just how powerful they can be over time. Let’s get started.

Speaker 1 (00:00):
Stock splits can quietly turn a small investment into a surprisingly large one, yet most investors don’t really understand how they work. And if a company you own announces a split, what should you actually do? I’m Kanwal Sarai, and welcome to the Simply Investing Dividend Podcast. Today we’re discussing stock splits and reverse splits in plain English, and we’ll also look at Coca-Cola’s remarkable split history to show you just how powerful they can be over time. Let’s get started. In today’s episode, we’re going to cover four topics. First, we’re going to start with what are stock splits. Then we’ll take a look at what are reverse stock splits. Then we’ll take a look at Coca-Cola’s, remarkable stock split history, and then we’ll discuss what to do when your stock splits. Let’s get started with our first topic. What exactly are stock splits? A split is when a company increases the number of its outstanding shares by issuing more shares to existing shareholders.

(01:18):
Now at the same time, the price per share decreases proportionally, so the total value of your investment stays exactly the same. Now, some common split ratios could be two for one, three for one or five for one. If we’re taking a look at an example of two for one, that means for every share you own you’re going to get double the number of shares. So why would companies do stock splits? Well, one of the reasons is to make the shares appear more affordable to new investors because we’ll see in a moment when the stock price, when it gets too high, and if you do a stock split, then the price is going to come down proportionally. So in some cases, a company may not want their stock price to be four $500 a share, and so they can do a stock split and that is going to reduce their share price.

(02:15):
Another reason is to increase liquidity, right? There’s going to be more shares available when you split those shares, and it could signal a confidence in future growth. So if a company does that, that could be a positive sign. And the other reason why companies do stock splits is to keep the stock price within a comfortable trading range. Again, sometimes they don’t want the price to go too high, 500, $800 a share, and so they may want to split it at that time. So let’s take a look at an example of a company and what it means to you as an investor when they split the shares. And in this example, we’re going to do a two for one stock split. So you can see here in this example the share price before the split, let’s say it’s a hundred dollars a share. After the stock is split, each share is now going to be worth $50.

(03:13):
So we cut the price in half because this is a two for one stock split. So for every share that you own, you’re now going to get double the number of shares, and you can see that up on the screen here. So in this example, if you own 50 shares in this company after the split, you will now own a hundred shares in this company. Now remember, the price also got cut in half, but you now have double the number of shares. Now in terms of the dividend, if the company pays a dividend, the dividend is going to get cut proportionally as well. And in this example, the company is paying a dividend of $1 per share. That’s the annual dividend. And after the split two for one split, the dividend is now going to drop to 50 cents a share. That’s going to get cut in half, just like the share price got cut in half.

(04:04):
That happens automatically the day when the stock is split. Now the dividend yield, in both cases, it’s 1%. Again, there’s no change here because remember, the dividend yield is the dividend divided by your share price expressed as a percentage. So in this case, the dividend yield doesn’t change and the total value of your investment also does not change. So in this example, you can see it up on the screen. Before the stock split, your investment was worth $5,000 because you had 50 shares multiply by the share price of $100, that’s 5,000. And after the split, you now have a hundred shares, but the stock price is 50. So you multiply the number of shares by the stock price, and again, you end up with $5,000. So there has been no change in the total value of your investment. And remember, nothing about the company’s fundamentals has changed, right?

(05:05):
The dividend got cut in half, but so did the share price, but now you got double number of shares. So this doesn’t change the fundamentals of the company. That’s just a split in the number of shares. Now, a couple of key points for dividend investors. As I said before, stock split does not change the total investment value. It does not change the dividend yield, and it does not change the company’s fundamentals. It only changes the number of shares you own the price of those shares and the dividend per share. Now, how often do companies split their stock? Right? You might be wondering that is a question. And so stock splits do not follow a fixed schedule. They occur only when a company chooses to do one, usually after a long period of strong share price growth. Some companies split multiple times over decades, while some companies don’t split at all.

(06:12):
And a good example of that is Berkshire Hathaway. They have never had a stock split in their entire history. So there is no fixed schedule. Companies can do a stock split when they want to, and if they choose not to do one, they won’t do one. Now, companies split shares. Again, like I said before, when the price has risen significantly, that’s when they’re normally going to do it, when the price is too high, because that makes the shares appear expensive to retail investors. And sometimes they might do stock splits to generate excitement and often occurred during periods of strong performance. And most recently, Nvidia did that and they had a 10 for one stock split when the stock price was very, very high. Very high. Okay, let’s move on to our topic number two. What are reverse stock splits? A reverse stock split is when a company reduces the number of its outstanding shares and increases the share price proportionally without changing the total value of the company or the value of the investors’ holdings.

(07:22):
So the common ratios here are going to be, for example, a one for two reverse split or a one for five reverse split. If you’re doing a one for two, that means that every two shares will become one. So why do companies do reverse stock splits? One of the reasons would be to avoid getting delisted from a stock exchange that requires a minimum share price. So if the share price falls too low, maybe a dollar a share or 50 cents a share or 5 cents a share, and stock exchanges are going to have minimum share price requirements. And if it drops too low, a company will have no choice but to do a reverse stock split. Another reason could be to improve the appearance of the stock price. It doesn’t sound so great when your stock price is trading at 15 cents a share versus 20 or $30 a share.

(08:16):
And another reason could be to meet certain institutional investor requirements. So now let’s take a look at an example of reverse one for two split. So what that means is that every two shares is going to become one. So in this example, let’s say the share price was $5 a share after the split. And here we’re doing a one for two split. The stock price is going to double the $10 a share, but the number of shares you own, and you can see it up on the screen here in this example, if you own 400 shares after the reverse split, you’re now going to have 200 shares. So the of shares you have gets cut in half, and if the company is paying a dividend, the dividend is also going to get cut in half. Now the dividend yield is not going to change, and the total value of your investment in this example is not going to change.

(09:11):
And you can see it up on the screen, multiply your number of shares by the share price, and you’ll see the total value is exactly the same before and after the reverse stock split. So how do investors interpret these stock splits? Well, reverse splits do not improve the company’s fundamentals. They only change the number of shares outstanding, and these are often viewed as a warning sign or a sign of financial distress. So remember that this is a yellow flag, could be a red flag. If a company is doing a reverse stock split, you have to do a little bit more research and understand why are they doing this? Is because the stock price has been low for a very long time? Are their earnings dropping? They’re not profitable, which is also pushing stock price down? Did they cut the dividend, eliminate the dividend altogether, which could also further push the stock price down Any changes in the company’s fundamentals, negative changes will push the stock price down.

(10:24):
And so a reverse stock split could be a warning sign that something is not well financially at that company. So now let’s take a look at Coca-Cola’s stock split history. So this is a real life example. We’re going to take a look at Coca-Cola. The company has had 11 stock splits since it first went public in 1919. So since its IPO since then, the company has paid dividends ever since then, and the company has had 64 years of consecutive dividend increases. So even when the stock is splitting over the long term, the dividends are going up, the company is increasing their dividends. So you can see here there’s a lot of numbers on the screen here, but these are showing each of the stock splits since the beginning of the company itself. So in 1919, let’s say you had one share, you bought one share in the company.

(11:31):
In 1927, there was a stock split, so it doubled the number of shares. So now you have two. In 1935, there was a four for one stock split. So now they multiply that by four. Now you have eight shares. And then 1960 was a three for one split, and you can see so on and so on and so on. We go through 11 splits since 1927, and you can see that one share in Coca-Cola. If you held onto it today, you would own 9,216 shares in Coca-Cola. Now, thanks to the help of chat GBT, we’re able to look up the historical numbers. And what I could find online was that on September 5th, 1919, when Coca-Cola went public, the share price was $40 per share. So that was the share price back then. Today, as of this recording in 2026, as of this recording, the share price is now $81 and 8 cents.

(12:40):
So if we take today’s share price and we multiplied by the number of shares that you would own today, and remember in this example, you started with one share and now you have 9,216 shares. Thanks to all of the 11 stock splits that one share today, the $40 share would be worth $747,233, which is an increase of over 1800000.0%. So that is tremendous amount of stock price appreciation. Now, if we take a look at this graph up on the screen, and this graph only goes back 36 years, that’s as far back as I could find it online. Here you can see the stock price. Stock prices go up and down all the time. However, the long-term trend is that the stock price has gone up and up over the long-term, and that’s with 11 stock splits in the company’s history. Yet the company share price has gone up.

(13:46):
And you’ll find this in most cases in general. Typically when a stock splits over time over the long term, the stock price is going to come right back up to where it was before the split happened, and then the company may split again. They might wait a couple more years and then split again. And then over the long term, the stock price is going to come right back up to where it was before the split. So what happens is you’re increasing the number of shares you own, but the stock price has gone up as well. Now, of course, this is happening in Coca-Cola’s case because the company has a long term track record and a history of profitability. And because of that profitability, the company’s able to increase its dividends like it’s done in the last 64 years consecutively, and that also helps to drive up the stock price.

(14:38):
Now, we’re not going to go all the way back to 1919. Let’s just go back to 1985 as an example, and let’s see what the investment would be worth today. So back in 19 85, 1 share of Coca-Cola was worth $62. Now, if somebody invested close to $10,000 here, 9,982 to be exact, let’s say you went ahead and bought 161 shares back in 1985, let’s take a look at what that would be worth today. So you can see it up on the screen here in 1985, you own 161 shares, so you invested close to $10,000 and you held onto those shares. In 1986, the company had a three for one split. So now your 161 shares has now turned into 483 shares. And then in 1990, there was another split two for one this time. So that doubled the number of shares to 966. And then in 1992, there was another two for one split that doubled the number of shares again, and now you have 1,932 shares.

(15:55):
In 96, they split again, and you have 3,864 shares. And in 2012, that was the most recent stock split, another two for one split, and you now own 7,728 shares in Coca-Cola. And remember, that’s without buying or selling any more shares since 1985, all you did was buy them originally and just held onto them. So let’s take a look here. So remember, the amount invested back in 1985 was $9,982. If you multiply the number of shares that you have today with today’s share price, that investment would be worth over $626,000 today. And if we take the number of shares that you have and multiply that by the dividend, which is $2 and 6 cents today, you would receive over $15,900 in dividends this year alone. So that’s annually. And now if we look at the capital gains, just the capital gains means we’re just looking at the stock price appreciation.

(17:11):
We’re not including all of the dividends received since 1985, just the stock price alone, you’re looking at an increase of over 6100%. So that is a pretty good, really good return on your investment. And all you have to do was buy the shares in Coca-Cola and just hold onto them, and the stock splits increased the number of shares that you own, which then increased the number of dividends that you continue to receive. So now let’s move on to our last topic here. So what do you do when stocks that you own have a stock split? So a couple of key points to remember here. Usually most of the time, and that’s what I do, if it’s a stock split, there’s nothing for you to do because like we said, the fundamentals have not changed. The dividends are the dividend yield is going to be the same.

(18:12):
So your dividend income is going to remain the same. The value of your investment is going to remain the same. So usually there’s nothing to do, you just have more shares and you just watch them and everything we talked about in the Simply Investing course, when do you sell your shares? We have a lesson on that that talks about it, the reasons for selling and the reasons for holding onto it, right? So if the company is still a quality company, it’s still undervalued, they’re still paying you dividends, they’re still growing the dividend consistently. And just because there was a stock split, that’s not going to change anything else. All things remaining equal, remaining the same. You would hold on to those shares, and as we saw in the example of Coca-Cola, you’re going to be rewarded pretty well over the long term as the company continues to grow its dividend.

(19:06):
And if they continue to do stock splits. Now the second thing to remember is that your broker, your software that you’re using to trade and track your stocks, your broker will automatically adjust your share count and your cost basis. So there’s nothing for you to do. You don’t need to call anybody or contact anyone. It’ll happen automatically, and you’ll see it on your account and on your statement when you log in and look at it. For most countries, there is no tax event here. So you’re not going to get taxed on capital gains. There is most countries that is going to be the case because it’s a stock split. The number of shares you own is going to change, and that’s it. The stock price will get adjusted accordingly. Same thing with the dividends. So remember, focus on the fundamentals. That’s what we talk about here at Simply Investing.

(19:59):
I’ve been doing this for over 25 years as a dividend investor. We are looking at the fundamentals, the earnings, the debt, the payout ratio. We’re looking at the PE ratio, we’re looking to see if the company is undervalued or overvalued. So those things do not change. Now, when do you need to pay attention? If the split is part of a larger corporate action, there’s something big going on. And what we’re looking for here are anything that would raise a yellow flag or a red flag, anything negative about the company in the news, in the media. And if it’s a reverse split that requires further investigation. So you want to look a little deeper into that as to why the company is doing this, and is this going to be a good thing for the company in the long term or not? If it’s not, then you may want to consider selling those shares, right?

(20:50):
And we cover that in detail in our Simply Investing course about when to look at selling shares in companies that you already own. So remember, I’m going to encourage you to think about long-term. We are long-term dividend investors, we think in terms of years and decades. And so when you’re making an investment, that’s what we’re looking for, a long-term mindset, and we’re going to hold onto those shares. The stock splits generally are fine. Reverse stock splits are something that you should take a look at in more detail. So again, I’m going to summarize this in one slide here. Stock splits don’t change the value of your investment. Reverse splits can be a warning sign. So you want to look into that. Coca-Cola’s history shows how the splits amplify long-term compounding. You saw that in the example one share held on for the long term, you could end up with over 9,600 shares.

(21:52):
And you saw how the investment grew quite rapidly after that, focus on the company’s fundamentals and not on the share account and keep a long-term mindset. So our approach at Simply Investing is to help you invest in quality dividend paying stocks when they are priced low. And this is going to help you build a resilient portfolio that provides you with growing dividend income each year. How do you do that? How do we help you with that? Well, I’ve created what I call the 12 Rules of Simply Investing. The 12 rules are designed to lower your risk, save you time, and help you earn more. You can see the 12 rules up on the screen now, and the way this works is before you invest in any company, you want to make sure that it passes all of the 12 rules of simply investing. If it fails even one rule, skip it.

(22:55):
Move on to something else. So rule number one, do you understand how the company is making money? Rule number two, 20 years from now, will people still need its product and services? Rule number three, does the company have a low cost competitive advantage? Rule number four, is the company recession proof? Rule number five, is the company profitable? Rule number six, does it grow its dividend? Rule number seven, can the company afford to pay the dividend? And rule number eight, is the debt less than 70%? Rule number nine, avoid any company with recent dividend cuts. Rule number 10, does the company buy back its own shares? Rule number 11 is the stock priced low. So we’re going to compare the current yield to the average 20 year yield. We’re going to look at the P ratio, and we’re going to look at the, we’re going to look at the PB ratio.

(23:48):
And rule number 12, keep your emotions out of investing. So if you’re interested, we have an all in one solution, which includes the Simply Investing Web application. That’s our platform and the Simply Investing Dividend Course. It’s an all-in-one solution. Our app is easy to use. It’s going to show you which companies are undervalued, which ones are overvalued, which ones pass our Simply investing criteria, which ones fail, so you can immediately know which companies to focus on and which ones to avoid. And we apply the Simply Investing criteria to over 6,000 companies in the US and in Canada every single day. And the Simply Investing Course is brought to you in 10 modules. They’re online video courses. You can watch self-paced. In module one, I cover the investing basics. Module two, I cover the 12 rules of Simply Investing in detail. Module three, you learn how to apply the 12 rules to any stock anywhere in the world.

(25:00):
Module four, show you how to use the Simply Investing Web Application. Module five, how to place your first stock order, module six, building and tracking your Portfolio. Module seven, when to sell. Module eight, how to reduce your fees and risk, especially if you own mutual funds, index funds, and ETFs. Module nine, your action plan to get started right away. And module 10, I answer your most frequently asked questions. So if you’re interested in all in one solution, you may want to write this down. We have a coupon code save 10 SAVE one zero. That’s going to save you 10% off of either the monthly subscription or the annual subscription, and you’ll get access to the course and the platform as well. If you enjoyed today’s episode, be sure to hit the subscribe button, hit the button as well. And for more information, take a look at our website, simply investing.com. Thanks for watching.