An idea came to me because Valentine’s Day was coming up. In the spirit of love and also countless numbers of people who ultimately split. I thought of stock splits. Get it? Yeah, I went there. When I dug into the data, I realized there’s a pattern that often unfolds after a stock split, one that can be highly profitable and tends to outperform the market.
Since I’m always looking for ways to find more money to put into dividend stocks, I was very interested to see that picking the right stock splits can yield 1x to even 10x in growth in a matter of a few years. It works best with growth companies and may have the opposites affect on dividend stocks.
You know I’m all about them divies, but I find growth stocks are worth buying if the metrics are right. I pick up growth stocks when I think there’s a chance of a big return because of the economic climate and macro trends. I also wouldn’t hesitate to scoop up a stock split if it looks profitable, knowing what I know now.
Podcast
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**DISCLAIMER**
Ticker metrics change as markets and companies change, so always do your own research.
The content on this site is based on personal experience and is for educational purposes, not financial advice. See full disclaimer here.
Types Of Stock Splits
There are two kinds of stock splits, a forward and a reverse.
In a forward stock split, holders of a stock will normally get two or three shares for every share they hold. Not all splits are 2-1 or 3-1, there are sometimes 10-1 or 25-1 splits, but a majority of the time they are 2-1 or 3-1.
In reverse stock splits, the opposite is true. Holders of a stock will normally get 1 share for every 10 shares they hold. Yeah, reverse stock splits are yucky.
Now that we know what you get on the investing end, let’s look at why do companies do splits.
Reasons Companies Do Stock Splits
Companies will perform a forward stock split for a couple reasons:
- To Get The Best Trading Range: Companies split their stock to keep the share price within a perceived best range that balances the needs of different investor types. That is, specific prices might appear strange or outlandish to investors.
- Lower Prices Attract More Investors: A lower post-split price is more accessible to retail investors.
- Liquidity Hypothesis: As we’ve seen, many argue that stocks trading at lower prices after a split are more liquid, attracting more investors and increasing trading volume.
- Signaling Theory: Stock splits serve as a signal from company insiders of positive prospects. Executives might be indicating their expectations of continued growth and rising stock prices.
- Attention Hypothesis: Stock splits may attract media and analyst attention, increasing visibility and potentially driving demand for the stock.
Companies will perform a reverse stock split for a couple reasons as well (none of them from a place of strength):
- Stay listed on an exchange: A company may need to perform a reverse split to meet a stock exchange’s minimum price requirements. For example, the New York Stock Exchange may delist a stock that closes below $1 for 30 days in a row.
- Attract investors: A higher share price can appeal to investors who might not buy stocks priced below a certain amount.
- Create spin-offs: A company may perform a reverse split to create spin-offs at attractive prices.
- Extend the life of a stock: A company may perform a reverse split to try to extend the life of a stock that is declining in value.
How Do Stock Splits Work
A company will announce a stock split, generally (but not always), when they report earnings. This announcement gives a date for the split to occur.
On the date of the split the number of shares will either increase (forward split) or decrease (reverse split). The share price will also reflect the new total number of shares. The market capitalization does not change at all, neither do any of the financial metrics.
Forward Split Example
On May 22, 2024, during Q1 earnings, NVDA reported a 10-1 stock split that would become effective June 7, 2024.
On June 7, after the market closed, investors who held NVDA stock received 9 additional shares.
On June 10, NVDA began trading at post-split price. Instead of $1,200 a share, NVDA traded at $120 a share. Total shares went up 10X, but NVDA’s market cap and financials all remained the same.
Reverse Split Example
BLUE announced a 1-20 reverse split on 12/04/2024 at its annual conference.
On 12/12/2024, investors who held BLUE kept 1 share for every 20 shares they held. The share price of BLUE went from $0.38 pre-split to $7.60 post-split. Total shares shrank by 20x.
BLUE did this to regain compliance with the NASDAQ. If you don’t know, to remain listed on exchanges there are minimum prices that must be kept (usually a company must be above $1 per share).
What History Shows Us About Stock Splits
Forward Split Data
Before a stock split, but after an announcement of a stock split, the stock set to split grows up to 3% in the months leading up to the split (65% of the time). Resource after resource shows that after the stock actually splits, the stock has 12-month returns of 25% to 30%, 80% of the time.
In fact, if you look at each decade since 1980 (Statista), forward stock split companies have performed better than the S&P each decade in the 12 months following the split. The results aren’t even close.
- 1980’s forward splits 26% vs 14.1% market gain
- 1990’s forward splits 35.8% vs 17.8% market gain
- 2000’s forward splits 9.5% vs (-1.1%) market loss
- 2010’s forward splits 18.3% vs 13.3% market gain
Reverse Split Data
For reverse stock splits, the period between the announcement of a stock split and the stock split date, the stock falls in price 4%-5%, 70% of the time. After the stock actually splits, the stock has a 66% chance of a negative return (decline) in the 12-month period after the split.
So you don’t want to be in any stocks that are doing a reverse split, unless you are in a short position.
Where To Find Companies That Are Splitting Stock
If you do a Google search for “stock split calendar for 2025”, you’ll find different resources. I personally think that Market Beat is the easiest to find this information, but they do have a lot of popups. Here is a list of ones I think have good calendars.
The only one that is listed as of now is SNEX. But as earnings reports roll in throughout 2025, I fully expect a lot of good quality companies to split their stock.
Once you have your calendar selected, check back every Saturday to see what’s upcoming. If you see a company you like, obviously you need to check the financials and the health of the company. Then it’s up to you if you want to pick the stock up before the split.
Remember there is a 33% chance it will lose value up to and including the stock split date. I usually wait until after the split to see what the share price does the week after it starts trading ex-split.
Our 2024 Stock Split Results
We picked up 2 stocks post-split the past year, NVDA and CMG.
NVDA did a split on 06/10/2024. We picked up NVDA between 06/20 and 07/31, adding shares as we had free cash. When the price fell down to the low side of the newly established trough, we picked up more shares. Our entry price is $124.47, and NVDA currently trades around $130.
CMG traded ex-split 06/26/2024. We picked up CMG on 08/01. Our entry price was $54.15, and CMG is currently around $57.
Our gains haven’t been earth-shattering (NVDA 4.4%; CMG 5.3%), but this has allowed us to afford some really good long-term growth stocks, that we never could have afforded at their pre-split prices. I do think NVDA is primed to take off soon. CMG might be a longer wait since it’s closing unprofitable stores.
Potential Stock Splits for 2025
I’ve made a list of companies I think might do a stock split in 2025 based on their current high prices and if they previously did stock splits. Their history will show where they’re likely to drop their prices down to.
- NFLX $1,016
- META $712
- MSFT $416
- AZO $3,467
- FICO $1,887
- COST $1,051
- ORLY $1,331
- SPOT $626
- HD $415
- DE $465
- CRWD $421
- LULU $412
As I mentioned above, if you’re interested in stock splits, you do need to keep up with checking in to see if any announcements have been made. Any of the above, quality companies, could announce a stock split in 2025. But if I had to bet, I think Netflix and Costco are the most likely candidates to do a forward split.
How To Incorporate Stock Splits Into Your Dividend Strategy
Strategy For Forward Splits
We are dividend investors, so if one of your dividend stocks ends up doing a stock split, it might also cut its dividend a few months down the line. The company has to pay their original dividend for the extra stock. They may realize this is an added financial strain and cut the dividend. That happened to us with MMM. The price usually goes down when news breaks that dividends will be cut.
A stock-split strategy would be best suited for increasing the amount of capital that you have to invest in your portfolio. If the stock doubles in a 2-year period , that’s more than you’d be able to make from dividend investing (except higher risk ETFs).
Depending on the stock, you may be in for a year or multi-year holding, so be intentional about tying up your capital. We never seem to have enough to go around when buying opportunities present themselves.
Note:
I recommend using a retirement account for growth stocks you plan on making big returns on. If you use a tax-advantaged account, you either pay taxes later or never again. This is especially nice if you hold the stock for less than a year and would need to pay the higher short-term capital gains rate.
A Roth IRA also allows you to pull out your contributions without penalty. Those can go back into your taxable brokerage account to compound.
However, if you want to go the taxable route, you can reduce your taxes by holding the stock for more than a year. Long-term capital gains are taxed at 15% or less, depending on your bracket.
Strategy For Reverse Splits
Knowing that a company is going to do a reverse split is very helpful if you’re in it. If you find this out before other investors, you’ll be able to get out with little damage. The longer you wait, the more likely it is that you’ll lose money.
Reverse splits are a prime candidate for short selling. This is an advanced strategy and not something we’ll get into here as it’s not something we deal with. Our investing approach is more passive. Shorts required avid attention because you incur fees daily.
In Closing
History shows that stock splits can be a great way to compound your money in a shorter period of time and beat market returns. I personally like the idea of buying a great company’s forward split after the stock actually splits. You may choose a different approach.
Good forward splits probably won’t happen too often, but if you check the stock-split calendars every month, you should be able to take advantage when a good one comes along. Adding this tactic to your arsenal will give you another way to expand your investing strategy. A successful investor has many tools in their belt and knows a good opportunity when they see one.
Do You Have Stock Split Wins?
I’d love to hear your any profitable stock splits you’ve had (including shorts), especially if they’re from methods I didn’t cover.